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Edited Transcript of GHG.L earnings conference call or presentation 24-Feb-20 12:00pm GMT

Full Year 2019 Georgia Healthcare Group PLC Earnings Call

Mar 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Georgia Healthcare Group PLC earnings conference call or presentation Monday, February 24, 2020 at 12:00:00pm 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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* Alexander Gnusarev

VTB Capital, Research Division - Equities Analyst

* Sally Anne Taylor

Numis Securities Limited, Research Division - Director & Healthcare Analyst

* Ilsa Carpenter

- 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 4Q 2019 full year results. (Operator Instructions) For your information, this conference is being recorded today.

Now I would like to hand over the conference to your speaker today, Nikoloz Gamkrelidze. Please go ahead.

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

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Thanks, operator. Good afternoon, everybody, and thanks for dialing in for this call. I plan to update you on the progress we have made in the fourth quarter and the full year as we are starting to capture the benefits of our last 2 years investments, and then I'll open the line for questions.

The group has continued to build on our recent significant investment program and has seen each businesses achieve many of their key milestones. I was particularly pleased to see the group's double-digit revenue growth of more than 13%, with supporting 17% EBITDA growth to GEL 154 million plus for the year, despite the recent changes in the UHC program, and this translated in the robust EPS growth of 33% for the year and close to 60% for the quarter. So these all numbers are excluding IFRS 16, as we are reporting both right now.

We continue to generate strong operating cash flow for the year, which has grew by 26% to 80% plus cash conversion ratio. And we have lowered our borrowings by 7% during the year. Consequently, we improved our return on invested capital by 100 basis points in 2019. As a result of this, our Board plans to recommend a 44% increase in the regular dividend to the Annual General Meeting in May.

I believe these results show strong progress in all areas. In addition, we see double-digit revenue growth opportunities over the medium term without a requirement of significant CapEx. We will continue to build out growth opportunities in developing medical tourism, retail lab diagnostic services, expanding our outpatient clinics and adding new pharmacies and products -- private-label products and some beauty products as well. We expect to continue to grow strongly, improve our operating cash flows, reduce the leverage further and increase our ROIC.

Now going to the segments. I'll start with the hospitals. Overall revenues of the hospital business increased by 9% to GEL 291 million, and EBITDA increased by close to 7% to GEL 75 million. And EBITDA margin, excluding the impact of the ramp-up of the 2 new hospitals, remained pretty strong, 29% plus for the quarter and 28% plus for the full year despite the new pension reforms that reduced our margin by around 100 basis points.

We have continued to make progress in our 2 new showcase facilities. Both new hospitals are now delivering strong revenue growth and posting double-digit EBITDA margins. Tbilisi Referral Hospital achieved 46% occupancy rate in Q4 and Caucasus Medical Center has achieved 37% occupancy rate. And you know that as a result, a high proportion of CMC revenues, which increased by more than 80% during the year, came from elective care services.

We are also making progress with our medical tourism efforts and active marketing campaign. We have seen a number of international patients increased by nearly 40% and we reached around GEL 5 million revenue in 2019.

In Q3 earnings call, I have mentioned that last November, Georgian government introduced some changes to the Universal Healthcare Programme, which became effective from November. In short, as a result of the recent oversupply of beds in the large cities of Georgia, government has equated certain tariffs on intensive care and cardiac services in Tbilisi and Kutaisi, mainly to the tariffs that are affecting the rest of the country.

Our estimate is the same, that these revised tariffs will lead to the reduction of the hospital revenues by approximately GEL 12 million in 2020 and gross profit of GEL 7 million. However, we have already started to absorb this impact in Q4 as these changes started from November. We will, of course, continue to work to mitigate these changes and one potential impact is that the change may drive more rapid consolidation of the market in the big cities, which has seen recently the start-up of number of small hospitals in the last couple of years.

As we discussed also on our Investor Day, we are working on several new projects. And next from this pipeline is the aesthetics market, which we are going to open. Our new aesthetic center there will be opened in next couple of weeks, which will capitalize on our boutique hospital, Caraps Medline brand, and utilize its existing strong plastic surgery and aesthetics practice. I hope this already recognized brand and service quality will highly contribute to the center's successful launch.

So now moving to the clinics business. In clinic network, we have delivered 16% revenue growth, while polyclinics part have increased 23%, and EBITDA growth was more than 50% during the year. And the margin itself has increased by over 500 basis points during the year as well as in the fourth quarter. So we have also increased the number of registered customers in polyclinics in the capital, and we are kind of got almost to 200,000.

The business EBITDA margin, again, as I mentioned, has increased to close to 20% for the full year, while in Q4, we reached 26%. This strong performance translated into the clinics' first-time positive contribution to the net profit compared to the negative contributions in the previous periods. So we will continue to pursue our polyclinic rollout strategies through the both organic growth and further small acquisitions, if there will be any; opening of the dental offices; new services and increasing the number of registered patients.

In pharmacy and distribution business, our pharma business continues to be a standout performer, with approximately 32% market share. We are clearly the largest pharmacy and distribution business in the country, and the business has continued its recent excellent performance.

Revenues continue to be very strong, up 19% over the last year and 22% in fourth quarter, reflecting the combination of both strong wholesale as well as further expansion of our retail chains, which -- where we have added around 26 pharmacies and reached 296 pharmacies at the year-end. Excluding the impact of the revenue from the centralized medicine procurement entities that we have transferred to our pharmacy and distribution business wholesale segment in 2019, the pharmacy and distribution business has posted 14% growth, headline growth, which is pretty strong.

We have significantly improved the pharmacy business EBITDA margin as well, as long as the positive operating leverage is kicking in. And we are standing for 10.6% for the full year, and we reached over 11% in the Q4, which is comfortably above our target of 9%.

I would also want to highlight the progress we are making with our private label in the personal care products, which is already on the shelves and which is helping us to increase our -- both gross margin as well as an EBITDA margin. First, our private label in the personal care products was introduced back in May in 2019 under the brand name of Attirance. And sales are not so big yet, it's around GEL 1 million, but basically, the growth is pretty significant. And the margin, obviously, we're generating is close to 70% on this part of the business. Overall, the pharmacy and distribution business continues to excel. It has grown its EBITDA by 25% to GEL 65 million plus.

Another development to mention, which was also updated to you on our Investor Day, is that our aim is to open the new markets, and one of it is a beauty segment. So we signed a franchise agreement with The Body Shop, and we have a right to operate the franchise exclusively for next 10 years in Georgia. So we are planning to open the 3 stand-alone stores this year, together with around 50 shop in shop in our upscale GPC pharmacies, and this will enable us to significantly upgrade our range of personal care offerings, and it's an exciting opportunity for us.

So in December, we launched the first stand-alone flagship shop, which, by the way, has already breaked even in January, and we have around 40 shop in shops already in place, which we'll increase the number of which at least to 50 within the year.

Now turning to the medical insurance business. The medical insurance business continued to deliver a very strong business performance. The team delivered on all key objectives for the year. Our net insurance premiums have increased by 37% year-over-year. Also, our retention rate, which is another KPI for the insurance company, increased to 42% plus for the year compared to under 14% in 2018. Profitability also was very strong and the insurance business achieved GEL 4.5 million net profit, which is a 50% increase over 2018 and combined ratios remained pretty healthy at 94%.

I would also want to mention here that we did not win the recent tender for the Ministry of Defence. It was a 1-year tender, which we won last year. And the number of our insured clients will fall this year as a result. This will reduce business revenues by around GEL 15 million, but will not have a material effect on the business profits because the loss ratio of this contract was significantly above the contract averages. I mean, profit and profitability, in general, remains our key priority in all contract discussions in insurance.

Diagnostics business. Turning to the Mega Lab, the largest diagnostic lab, which we opened just about 12 months ago. The diagnostics business have already reached the breakeven EBITDA, with the cost of the lab services at the group's health care facilities having been maintained at the same level. Over 670,000 tests have been performed in 2019, which is a significant achievement. And basically, we achieved at all of our internal demand which should have been centralized, is already centralized within the Mega Lab.

On top of it, we have now opened 10 blood collection points in our GPC pharmacies. So we are kind of upgrading our offering in our pharmacies, offering not only product but also service, which was very well received by the customers and we are kind of targeting to open around 50 blood collection points over the next few years. So we are also obviously working on additional external contracts, which will serve non-GHG health care facilities where we also have a very nice progress.

As you will already know, we have a number of internal, very important clinical quality and IT development projects in our pipeline. This is more -- there are more details in the announcement published this morning, but I will draw attention onto a couple of them. So we had made a very strong progress in implementation of our integrated health care system, launching very comprehensive EMR system in all of our polyclinics and community clinics in 2019. So all of them are paperless right now, which was a significant achievement. We have successfully implemented our medical ordering system in all of our referral hospitals, covering 60% of the EMR functionality, and we will continue to roll out the full-fledged EMR in the hospitals. And we need another 3 or 4 months to cover also the whole hospitals with the full-fledged EMR. So it will kind of enhance faster the efficiency plus increase the quality of service that our hospitals are delivering.

Our innovative new digital customer platform, which we have presented on the Investor Day called EKIMO, which is in Georgian, Dear Doctor, is now complete and it was fully launched. This is truly groundbreaking in Georgia and consolidating not only in Georgia. I think it consolidates the entire spectrum in primary care through the country, primary care doctors, clinics, diagnostics, pharmacies, medical insurance and more. And it's -- most importantly it's open for any local health care provider and they're plugging in there quite actively.

By providing a fully consolidated customer journey through the health care system, EKIMO will significantly improve the quality of health care and the customer experience for our customers.

Share exchange facility. I just throw factual comments here. In November 2019, Georgia Capital, our majority shareholder, who owned 57% of the group, announced the opportunity for shareholders of GHG to exchange their shares in the GCAP shares. The Board of GHG believed it's appropriate for the proposal to be shared with the GHG shareholders as well as it was optional and welcomed GCAP's continued confidence in GHG's management and strategy to support it as an independent and listed company. Valid acceptances in respect of over 40 million GHG shares were received, which were scaled back by 56% in accordance with the requirement of the U.K. Listing Rules, which limited the number of GCAP shares that could have been exchanged to avoid an adverse impact on the GHG public listing and index eligibility. On completion of the exchange facility in December, GCAP shareholding in GHG increased from 57% to 70.6%.

A little bit about the country and the macro economy. Georgia has continued its very strong progress and growth, economic growth despite the Russia flight ban, which we which got in July. The real GDP growth was very strong, and it grew 5.2%, and its GDP growth expectations remained very strong. The country fully absorbed the impact of the Russia flight ban, which was pretty limited, I would say. And we have already just received the January numbers, where the tourist inflows have grown 19%.

So we have a very strong progress in the tax receipts. And current account deficit has also made another record and it's all-time low at 4.4% right now. Although higher inflation due to the small devaluation had increased pressure on the Central Bank, and they have increased the monetary policy rate with around 250 bps in September and October, which has increased our funding costs as well, but we expect this to return to the lower levels once the inflationary pressures will be removed. Meanwhile, our group-wide exercise remain to reduce the borrowing costs and further deleverage the balance sheet.

To finalize, we are seeing the benefit of the recent investments throughout the business start to materialize, and I'm pleased with the progress we have made in 2019. The business has gone through the clear inflection point with regard to our major capital investment requirements, and we are now benefiting from these investments. This is evident in the growth of the net profit and EPS being considerably higher than the double-digit growth in the EBITDA. The group continues to deliver good revenue momentum, strong cash generation, balance sheet deleveraging and improving our return on invested capital. We have significant new growth opportunities in areas such as medical tourism, outpatient services, dental services, lab retail and so on. And our clear focus will be to benefit from these opportunities while continuing to deliver strong organic growth and operational performance.

Thank you. And 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) We have a question from the line of Sally Taylor from Numis.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [2]

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Just the first one, are you able to give us a sense of what the Georgian health care budget looks like for 2020, please? Obviously, we've seen some UHC tariff changes impact towards the end of last year. And I wondered if that implied a sort of flat budget year-on-year, please.

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

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Yes. Basically, what we have seen -- so first of all, the changes the government made in November are anticipated to kind of save them around GEL 40 million on annual basis. So based on that, they have kept the budget on the UHC flat, which is GEL 760 million roughly.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [4]

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And some of the delays that you saw towards the end of last year in terms of elective procedures being sort of authorized and reimbursed, are you seeing that pent-up demand come back in the first quarter?

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [5]

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Yes. I mean, they have fully released this basically. As long as they had a budget pressures, they basically queued up the guarantee letters a little bit. Upon from January, they have released it further.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [6]

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Are you able to give us a sense of the quantum of that?

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [7]

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It's very hard to judge right now, but basically you can set.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [8]

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And just thinking about sort of going forward, I think you highlighted that the tariffs are quite different between certain big cities and outside those big cities and particularly, that's why your critical care and cardiac services have been targeted. Are there any other services where there is that price differential that could be at risk?

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [9]

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Yes. There is some price differentials in the big cities. But again, so these 2 services, which were the intensive care and the cardiac services, we have covering more than half of the exposure on the UHC. So basically, I don't rule out any other changes. But basically, significance of this will not be close to that.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [10]

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That's helpful. And then just last question. I think you talked about significant progress with EKIMO, the digital health side of your business. Are you able to give us any parameters in terms of either financials or user numbers and how that's tracking, please?

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [11]

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As long as we have had made the full launch basically in this late December, January, it's hard to judge now. Only number I can give there, basically, and which I'm pleased about is that external doctors are plugging in. So in a system, we have around 400-plus external doctors and on the back of that, clinics as well, who had already joined the EKIMO. So it's -- for me, it was important not to, because, say that, as a captive business, and it should have been there for all of the country. And basically, we are kind of on a start of reaching this goal. So I'll be more -- in more in a position to update you on further numbers, I think, at the end of May on our Q1 results.

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Operator [12]

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(Operator Instructions) We have another question from the line of Alexander Gnusarev.

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Alexander Gnusarev, VTB Capital, Research Division - Equities Analyst [13]

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I just wanted to ask a couple of questions. My first question is what are your approximate estimations of CapEx for 2020? They will be just mostly maintenance CapEx or you're planning some perhaps expansion. And what are your assumptions on your net debt by the year-end?

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

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Thank you. So for CapEx, we gave a guidance for the next several years. So we will be in the range of GEL 30 million, GEL 35 million, which will include both maintenance as well as group-wide some developments. So just to give you more color, it's -- somewhere half of it will be maintenance across the whole group and then other half some developments, such as running new pharmacies, opening new polyclinics or rolling out new services, aesthetics, et cetera, et cetera, some growth opportunities, so in a range of GEL 30 million, GEL 35 million. For the net debt, we guided that we will be less than 2% at the year-end of 2020. So we are standing now at 2.15% or so. So we will be certainly less than 2% at the end of the 2020. How much it will be, let's see.

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Alexander Gnusarev, VTB Capital, Research Division - Equities Analyst [15]

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Also another question. What are your plans on pharmacy openings for 2020? And have you already started the rolling out of your pharmacies in Armenia?

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

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Thank you. So it's more or less on demand based for -- we will be opening maybe somewhere around 15 pharmacies more this year, maybe slightly less, slightly more. As for Armenia, we have already opened 4 pharmacies. We will be opening 1 or 2 more. It's a (inaudible) pharmacy, which we opened in the capital of Armenia. They are performing pretty well. Again, we don't have a very clear strategy how to move forward in Armenia. So we are currently working on that. We will be discussing this on the upcoming Board meetings at the end of the March, and then we will kind of inform the market how we see it going forward. But basically, in general, I'm pretty pleased how these 4 pharmacies have performed in 2019.

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Alexander Gnusarev, VTB Capital, Research Division - Equities Analyst [17]

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And very last question, on your -- the strategy of Georgia Capital. What are the plans regarding their current stake? They plan to increase it more, or they're going to decrease it? So maybe you can comment on that.

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [18]

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I'm not in a position to comment on the plans of Georgia Capital. It's better you ask them on that.

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Operator [19]

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(Operator Instructions) Another question comes from the line of [Ilsa Carpenter].

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Ilsa Carpenter, - Analyst [20]

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A question related to last one, and that is the collapse in liquidity in your shares over the recent months. Can you comment on this? And any objectives you may have to improve liquidity in the stock going forward, given that the free float has just taken a further reduction after the Georgia Capital exchange?

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

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So one thing I can comment. So it does not kind of have anything to do with the fundamentals of the company. Fundamentals of the company remain pretty strong. I would see it as a technical collapse, as you have mentioned. Obviously, we are thinking about how to improve the liquidity or how to kind of sort out the situation. But again, I'm not in a position right now to comment on any particular thing.

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Operator [22]

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(Operator Instructions) There are no more questions at the moment. Please go ahead.

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

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Thank you. If there are no more questions, thanks for dialing in, and looking forward to see you in the coming months. Thank you.

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Operator [24]

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Ladies and gentlemen, this concludes the conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.