Information  X 
Enter a valid email address

Georgia Healthcare (GHG)

  Print      Mail a friend

Wednesday 14 August, 2019

Georgia Healthcare

Half-year Report

RNS Number : 9927I
Georgia Healthcare Group PLC
14 August 2019
 

2nd quarter and half-year 2019

 Results

www.ghg.com.ge

Name of authorised official of issuer responsible for making notification:

Ketevan Kalandarishvili, Head of Investor Relations

 

An investor/analyst conference call, organised by GHG, will be held on Wednesday, 14 August 2019, at 15:00 UK / 16:00 CET / 10:00 U.S Eastern Time. The duration of the call will be 60 minutes and will consist of a 15-minute update and a 45-minute Q&A session.

Dial-in numbers:

30-Day replay

Pass code for replays / conference ID: 5395607

Pass code for replays / conference ID: 5395607

International Dial in: +44 (0) 2071 928338

International Dial in: +44 (0) 3333 00 97 85

UK: 08444819752

UK National Dial in: 08717000471

US: 16467413167

UK Local Dial in: 08445718951

Austria: 019284090

US Free Call Dial in: 1 (917) 677 7532

Belgium: 027933847

 

Czech Republic: 228881958

 

Finland: 0923113291

 

France: 0170700781

 

Germany: 03052002085

 

Ireland: 015060650

 

Italy: 0236006670

 

Netherlands: 0207956614

 

Norway: 21563015

 

Spain: 914143675

 

Sweden: 0856618467

 

Switzerland: 0445807145

 

 

 

 

TABLE OF CONTENTS

 

2Q 2019 PERFORMANCE highlights.

CEO Statement

Discussion of Group Results

Income statement

balance sheet

Cash flow

Discussion of SeGMENT ResulTS

Discussion of Hospitals BUSINESS RESULTS

Discussion of Clinics BUSINESS RESULTS

Discussion of pharmacy and distribution bUSINESS RESULTS

Discussion of MEDICAL INSURANCE BUSINESS RESULTS

Discussion of Diagnostics BUSINESS RESULTS

selected financial information..

PRINCIPAL RISKS & UNCERTANTIES

Statement of Directors' Responsibilities

CONSOLIDATED FINANCIAL STATEMENTS

INDEPENDENT REVIEW REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF GEORGIA HEALTHCARE GROUP PLC

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SELECTED EXPLANATORY NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Annex

COMPANY INFORMATION

 

 

 

Forward looking statements

This announcement contains forward-looking statements, including, but not limited to, statements concerning expectations, projections, objectives, targets, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, competitive strengths and weaknesses, plans or goals relating to financial position and future operations and development. Although Georgia Healthcare Group PLC believes that the expectations and opinions reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations and opinions will prove to have been correct. By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements, certain of which are beyond our control, include, among other things: business integration risk; compliance risk; recruitment and retention of skilled medical practitioners risk: clinical risk; concentration of revenue and the Universal Healthcare Programme; currency and macroeconomic; information technology and operational risk; regional tensions and political risk; and other key factors that we have indicated could adversely affect our business and financial performance, which are contained elsewhere in this document and in our past and future filings and reports, including the "Principal Risks and Uncertainties" included in Georgia Healthcare Group PLC's Annual Report and Accounts 2018 and in this announcement. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in Georgia Healthcare Group PLC or any other entity, and must not be relied upon in any way in connection with any investment decision. Georgia Healthcare Group PLC undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. Nothing in this document should be construed as a profit forecast.

Georgia Healthcare Group PLC ("GHG" or the "Group" - LSE: GHG LN), announces the Group's second quarter and half-year 2019 consolidated financial results. Unless otherwise mentioned, comparatives are for the second quarter of 2018. The results are based on International Financial Reporting Standards ("IFRS") as adopted in the European Union ("EU"), are unaudited and extracted from management accounts.

FINANCIAL PERFORMANCE HIGHLIGHTS

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

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

 

GHG - the market leader in Georgia's healthcare ecosystem

GEL million; unless otherwise noted

2Q19

2Q18

Change,

Y-o-Y

 

1H19

1H18

Change,

Y-o-Y

 

 

 

 

 

Revenue, gross 

 237.7

 211.8

12.2%

 

 472.9

 419.5

12.7%

EBITDA excluding IFRS 16

 37.4

 31.2

19.6%

 

 74.8

 62.6

19.4%

Net Profit excluding IFRS 16

 13.0

 12.4

5.2%

 

 31.3

 28.4

10.2%

EPS adjusted1, GEL excluding IFRS 16

0.09

0.06

51.0%

 

0.19

0.14

33.1%

ROIC adjusted2 (%)

14.4%

13.8%

0.6 ppts

 

14.4%

13.7%

0.7 ppts

 

 

 

 

 

 

 

 

Hospitals business

 

 

 

 

 

 

 

Revenue, gross

 74.2

 67.8

9.5%

 

 149.0

 132.1

12.8%

EBITDA excluding IFRS 16

 18.8

 17.4

8.1%

 

 38.0

 34.5

10.1%

EBITDA margin (%) excluding IFRS 16

25.4%

25.7%

-0.3 ppts

 

25.5%

26.1%

-0.6 ppts

Net Profit excluding IFRS 16

 4.2

 4.5

-7.9%

 

 10.1

 10.5

-4.0%

 

 

 

 

 

 

 

 

Clinics business

 

 

 

 

 

 

 

Revenue, gross

 10.9

 10.0

9.2%

 

 22.0

 19.4

13.3%

EBITDA excluding IFRS 16

 1.9

 1.4

38.6%

 

 4.0

 2.8

44.8%

EBITDA margin (%) excluding IFRS 16

17.5%

13.8%

3.7 ppts

 

18.1%

14.2%

3.9 ppts

Net Profit excluding IFRS 16

 (0.4)

 (0.9)

-54.4%

 

 (0.6)

 (1.5)

-62.1%

 

 

 

 

 

 

 

 

Pharmacy and distribution business

 

 

 

 

 

 

 

Revenue

 149.4

 127.3

17.4%

 

 295.2

 254.2

16.1%

Gross profit margin (%)

24.1%

24.7%

-0.6%

 

25.2%

24.7%

0.5%

EBITDA excluding IFRS 16

 15.3

 11.9

28.8%

 

 30.9

 24.6

25.8%

EBITDA margin (%) excluding IFRS 16

10.3%

9.4%

0.9 ppts

 

10.5%

9.7%

0.8 ppts

Net Profit excluding IFRS 16

 8.2

 8.5

-2.6%

 

 20.4

 19.3

5.7%

 

 

 

 

 

 

 

 

Medical insurance business

 

 

 

 

 

 

 

Net insurance premiums earned

 18.9

 13.7

37.7%

 

 36.4

 27.0

34.7%

Loss ratio (%)

82.6%

82.4%

0.2 ppts

 

83.9%

83.4%

0.5 ppts

Combined ratio (%) excluding IFRS 16

94.5%

97.6%

-3.1 ppts

 

96.1%

98.8%

-2.7 ppts

EBITDA excluding IFRS 16

 1.2

 0.5

138.9%

 

 1.8

 0.7

149.3%

Net Profit/ (Loss) excluding IFRS 16

 1.0

 0.3

218.7%

 

 1.5

 0.2

512.7%

Diagnostic

 

 

 

 

 

 

 

Revenue

 1.1

 0.7

65.8%

 

 2.3

 1.4

65.8%

Gross profit margin (%)

31.6%

17.4%

14.2 ppts

 

29.8%

21.8%

8.0 ppts

EBITDA excluding IFRS 16

 0.0

 (0.0)

NMF

 

 0.1

 0.1

29.3%

EBITDA margin (%) excluding IFRS 16

4.3%

NMF

NMF

 

4.2%

5.4%

NMF

Net Profit/ (Loss) excluding IFRS 16

 (0.0)

 (0.1)

NMF

 

 (0.0)

 (0.0)

NMF

 

Adjusted for non-recurring items and foreign currency losses

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

 CHIEF EXECUTIVE OFFICER'S STATEMENT

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

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

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

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

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

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

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

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

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

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

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

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

****

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

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

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

Nikoloz Gamkrelidze,

CEO of Georgia Healthcare Group PLC

13 August 2019

 

DISCUSSION OF GROUP RESULTS

GHG overview

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

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

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

·      hospitals business operates 18 referral hospitals with a total of 2,967 beds, providing secondary or tertiary level healthcare services, located in Tbilisi and major regional cities.

·      clinics business operates 34 healthcare facilities, out of which:

-      19 are community clinics with a total of 353 beds, providing outpatient and basic inpatient healthcare services, located in regional towns and municipalities.

-      15 are district polyclinics, providing outpatient diagnostic and treatment services, located in Tbilisi and major regional cities.

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

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

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

 

Significant external events, accounting change and legislative developments affecting 2019 results

-      Lari depreciation.  During the second quarter, the Georgian Lari depreciated more than 6% against both the US dollar and the Euro. The Lari depreciation led to a significant foreign currency exchange loss in the second quarter which (excluding the IFRS 16 effect) was mainly due to the revaluation of foreign currency denominated payable balances of pharmacy and distribution business.  In July the national currency depreciated a further 3% against the dollar. On August 1 the National Bank of Georgia, which had accumulated record high reserves at US$3.7 billion as of June 2019, intervened in the market to curb the depreciation expectations, and since August 1 the Lari has gained around 2%.

The Lari decline was driven by spillovers from regional tensions including the Russian government decision to cancel all air connections with Georgia, which in turn had a negative effect on tourism and fed depreciation expectations. See page 6 for additional information. Barring further negative external factors, the Group expects the macro-economic fundamentals to support further stabilisation of the national currency in near to medium term.  Exchange rate developments depend on many factors and by their nature are very difficult to predict.  

 

-      New pension reform.  In January 2019, a new pension system became mandatory in Georgia, with participation mandatory for employees under the age of 40, and optional for employees older than 40. Each employee contributes 2% of their income to an individual retirement account, which then benefits from further 2% contributions from both the employer, and (subject to ceilings based on income) the Government. The group participates in this programme, and the total anticipated cost to the Group in 2019 is approximately GEL 4.5 million.

 

-      IFRS 16 impact.  The Group adopted IFRS 16 "Leases" from 1 January 2019. The key change arising from IFRS 16 is that rent expense is reclassified from operating expense to interest and depreciation expense. IFRS 16 impact on Group's EBITDA was GEL 5.3 million in 2Q19 and GEL 10.4 million in HY19, out of which the pharmacy and distribution business accounted for GEL 4.7 million and GEL 9.1 million, respectively. The negative impact on the Group's net profit was GEL 5.2 million in 2Q19 and GEL 6.2 million in HY19, out of which GEL 4.5 million and GEL 4.8 million respectively, resulted from foreign exchange loss on the revaluation of the finance lease liabilities balance. About 85% of the finance lease liabilities balance represents foreign currency denominated leases the value of which increased in line with the depreciation of the national currency at the end

 

-      of second quarter. As this negative impact is solely the result of the accounting change, we do not comment on it further in this report although the full effects are reflected in the accounts.

According to the Group's preliminary calculation, IFRS 16 annual positive impact on the Group's 2019 EBITDA will be around GEL 20 million, of which the pharmacy and distribution business will account for c.GEL 18 million. The negative impact on the Group's 2019 net profit is estimated around GEL 2.5 million (excluding FX movement); however, this negative impact on net profit is just a timing difference that decreases over time and eventually reaches net effect of zero. Assets and liabilities also increased by the amount of discounted cash flows of future rent payments. Below in this report, to allow for comparisons, the numbers are disclosed with and excluding IFRS 16.

 

Income statement, GHG consolidated

 

GEL thousands; unless otherwise noted

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Revenue, gross

237,660

211,791

12.2%

472,872

419,480

12.7%

Corrections & rebates

(605)

(1,087)

-44.3%

(1,164)

(1,780)

-34.6%

Revenue, net

237,055

210,704

12.5%

471,708

417,700

12.9%

Costs of services

(163,163)

(145,694)

12.0%

 (321,660)

 (288,847)

11.4%

Gross profit

73,892

65,010

13.7%

150,048

128,853

16.4%

Salaries and other employee benefits

(23,922)

(20,793)

15.1%

(47,317)

(41,232)

14.8%

General and administrative expenses excluding IFRS 16 impact

(15,290)

(13,565)

12.7%

(30,097)

(26,202)

14.9%

Impairment of receivables

(1,140)

(1,213)

-6.0%

(2,312)

(2,401)

-3.7%

Other operating income

3,826

1,793

113.4%

4,454

3,613

23.3%

EBITDA excluding IFRS 16

37,365

31,232

19.6%

74,776

62,631

19.4%

IFRS 16 impact on EBITDA3

5,261

-

NMF

10,387

-

NMF

Depreciation and amortization excluding IFRS 16

(8,975)

(8,847)

1.4%

(17,654)

(16,562)

6.6%

Depreciation and amortisation

(13,633)

(8,847)

54.1%

(26,809)

(16,562)

61.9%

Net interest income (expense) excluding IFRS 16

(10,341)

(9,587)

7.9%

(20,702)

(18,150)

14.1%

Net interest income (expense)

(11,715)

(9,587)

22.2%

(23,353)

(18,150)

28.7%

Net gains/(losses) from foreign currencies excluding IFRS 16

(4,388)

351

NMF

(4,244)

2,250

NMF

Net gains/(losses) from foreign currencies

(8,846)

351

NMF

(8,995)

2,250

NMF

Net non-recurring income/(expense)

(371)

(656)

-43.5%

(527)

(1,662)

-68.3%

Profit before income tax expense

8,062

12,493

-35.5%

25,479

28,507

-10.6%

Income tax benefit/(expense)

(272)

(115)

NMF

(357)

(117)

205.1%

Profit for the period excluding IFRS 16

13,019

12,378

5.2%

31,292

28,390

10.2%

Profit for the period

7,790

12,378

-37.1%

25,122

28,390

-11.5%

 

Gross Revenue. We delivered double digit revenue growth in both reporting periods, driven by the double-digit revenue growth across almost all GHG segments.

In HY19, the Group's revenue diversification across its segments was: 58% from pharmacy and distribution, 29% from the hospitals, 8% from medical insurance, 4% from clinics, and the remaining 1% from the newly added diagnostics business. By payor mix, 53% of the Group's total revenue was from out-of-pocket payments4; 25% from UHC payments; and 22% from other sources.

Gross Profit. The Group continued to deliver increasing gross profit and improved its gross margin by 100 bps y-o-y, reaching 31.7% in HY19. Quarterly gross margin was also up 40 bps y-o-y, to 31.1%. The pharmacy and distribution business, excluding the effect of intercompany sales which are eliminated upon consolidation, contributed a major part of the growth. The next largest contributor to the Group margin improvement was our hospitals business, despite the impact of the mandatory pension reform (effective from January 2019), which increased cost of salaries and other employee benefits by c.2%.

In total, the pension reform increased the Group's salary expenses by GEL c.1.1 million in 2Q19 and by c.2.1 million in HY19. Despite this, as a result of well-managed efficiency and cost control measures, the cost base on a gross profit as well as on the operating expenses level were well controlled and the Group delivered positive operating leverage in both reporting periods of 5.6 ppts and 2.7 ppts in 2Q19 and HY19, respectively.

EBITDA excluding IFRS 16. The Group delivered strong quarterly and half year EBITDA growth, up 19.6% and 19.4% y-o-y, respectively. The hospitals business was the main contributor to the Group's 1H19 EBITDA, contributing 51% in total, with a 25.5% EBITDA margin. The next largest contributor was the pharmacy and distribution business, with a 41% share, posting a strong double-digit EBITDA margin of 10.5%. Our clinics and medical insurance businesses contributed 5% and 3% to the Group's half year EBITDA respectively.

Depreciation and amortisation excluding IFRS 16. After completing a number of sizeable development projects, Group depreciation expense stabilised. Slight y-o-y and q-o-q movements mainly relate to small investments by all segments in different capital expenditure projects.

Net interest expense excluding IFRS 16. The y-o-y increase in net interest expense was in line with the increased balance of borrowed funds to finance planned capital expenditure. As the Group is now out of heavy capex mode, its leverage started to decrease gradually in line with the debt principal repayment schedule. Our q-o-q borrowings balance is down 1.3% translating in slight reduction in corresponding interest expense, down 20 bps.

Loss from foreign currencies excluding IFRS 16. The loss from foreign currency is mainly attributable to the pharmacy and distribution business. About 70% of inventory purchases in the pharmacy and distribution business are denominated in foreign currency: c.40% in EUR and c.30% in USD. In 2Q19, local currency devalued by more than 6% against USD and EUR, which resulted in an increased quarterly FX loss from revaluation of accounts payable balances (as discussed on page 8 above, the loss including IFRS 16 is also attributable mainly to pharma).

Profit excluding IFRS 16. The result of all of the above was a meaningful increase in Group profit - up 5.2% and 10.2% in 2Q19 and 1H19, respectively - even in the face of the FX loss. The pharmacy and distribution business continues to be the main driver of 2Q19 and 1H19 Group profit, contributing 63% and 65% in total respectively, followed by the hospitals business, contributing 32% in both periods.

3 Represents IFRS 16 impact on General and administrative expenses

4 Includes: hospitals and clinics out-of-pocket revenue, pharmacy and distribution, medical insurance and diagnostics businesses' revenue from retail

 

Selected balance sheet items, GHG consolidated

GEL thousands; unless otherwise noted

30-Jun-19

31-Mar-19

 Change,

Q-o-Q

 Total assets, of which:

1,345,810

1,331,760

1.1%

 Cash and bank deposits

27,207

27,596

-1.4%

 Receivables from healthcare services

124,050

115,312

7.6%

 Receivables from sale of pharmaceuticals

18,808

19,571

-3.9%

 Insurance premiums receivable

44,737

53,244

-16.0%

 Property and equipment, of which

769,092

767,454

0.2%

 IFRS 16 impact

79,908

76,379

4.6%

 Goodwill and other intangible assets

156,042

151,561

3.0%

 Inventory

157,132

146,499

7.3%

 Prepayments

14,156

17,579

-19.5%

 Other assets

34,586

32,944

5.0%

 Total liabilities, of which:

757,709

747,390

1.4%

 Borrowed funds

368,895

373,745

-1.3%

 Accounts payable

119,784

104,001

15.2%

 Insurance contract liabilities

43,160

50,420

-14.4%

 Finance lease liabilities

85,942

78,145

10.0%

 Other liabilities

139,928

141,079

-0.8%

 Total shareholders' equity attributable to:

588,101

584,370

0.6%

Shareholders of the Company

518,286

516,252

0.4%

Non-controlling interest

69,815

68,118

2.5%

 

 

 

 

 

§ The increase in receivables from healthcare services corresponds increased revenues from hospitals and clinics business.

 

§ The majority of medical insurance contracts mature and renew in January every year, causing the insurance premium receivable as well as insurance contract liabilities balances to increase in 1Q19 and reduce gradually in line with contract amortisation terms.

 

§ The q-o-q increase in accounts payable is attributable to pharmacy and distribution business, mainly due to increased stock (inventory balance increased by GEL 10.6 million, up 7.3% q-o-q) to support sales growth and due to revaluation of foreign currency denominated accounts payable balances, explained above.

 

5Out of which GEL 77.2 million accounts for IFRS 16 impact

 

Statements of cash flows, GHG consolidated5

 

GEL thousands; unless otherwise noted

HY19

HY18

Change,

Y-o-Y

EBITDA

74,776

62,631

19.4%

Net cash flows from operating activities

55,170

44,242

24.7%

 

 

 

 

EBITDA to Cash Conversion

73.8%

70.6%

3.2%

 

 

 

 

Net cash used in investing activities, of which:

(23,205)

(55,400)

-58.1%

Purchase of PPE and intangibles

(20,665)

(43,856)

-52.9%

Net cash flows from financing activities

(52,615)

(20,378)

158.2%

Effect of exchange rate changes

6

(776)

NMF

Net increase (decrease) in cash and cash equivalents

(20,644)

(32,312)

-36.1%

 

 

 

 

Cash at period, beginning

36,154

48,840

-26.0%

Cash at period, ending

15,510

16,528

-6.2%

 

 

 

 

Bank deposits, beginning

11,807

14,768

-20.1%

Bank deposits, ending

11,697

10,167

15.0%

 

 

 

 

Cash and bank deposits, beginning

47,961

63,608

-24.6%

Cash and cash deposits, ending

27,207

26,695

1.9%

 

 

 

 

 

Cash flows from operating activities. Net cash flows from operating activities increased in 1H19 on the back of stronger EBITDA and an improved EBITDA to cash conversion ratio (up 3.2% to 73.8%). As the newly opened facilities and services progress towards their run rate the benefits of these projects have begun to materialise, including the gradual reduction in working capital needs. Going forward we expect further improvement of the cash conversion ratio.

Cash flows from investing activities. Net cash used in investing activities continues to decline and more than halved in 1H19. 2018 was the final year of our major investment programme and investment volume slowed further in 2019 (outflow for purchase of PPE and intangibles down 52.9% y-o-y) as the projects completed. In 1H19, net cash used in investing activities also includes GEL 5.2 million (GEL 12.9 million in 1H18) payment of holdback for the pharmacy and distribution business acquisition.

Cash flows from financing activities. With our improved operational cash flow and lower capital investment requirements, the Group has stabilised needs for borrowings and started to repay its loans in line with the debt repayment schedules. Net outflow from financing activities reflects reduction of borrowings balance by c.GEL 21.5 million since 31 December 2018 (down 5.5%), interest payments and the dividend paid to non-controlling interest shareholders of GEL 5 million.

The overall effect resulted in cash and bank deposits at 30 June 2019 of GEL 27.2 million.

Going forward a continuing increase in operating cash flow, an improved EBITDA to cash conversion ratio and substantially reduced investment programme should allow us to both further reduce debt and increase cash year on year.

6 Statement of cash flows is presented excluding IFRS 16 impact. Refer to back section of the release (page 38) to see the full statement of cash flows (including IFRS 16 impact).

DISCUSSION OF SEGMENT RESULTS

The segment results discussion is presented for hospitals, clinics, pharmacy and distribution, medical insurance and diagnostics businesses.

Discussion of Hospitals Business Results

Operational highlights:

§ Following the split of our healthcare services business (described on page 7), our management has revised the classification of our hospitals and clinics. Three of our clinics have become sufficiently large to merit hospitals classification and one of our hospitals was classified as a clinic due to the nature of services offered. For comparison purposes, we will discuss our hospitals and clinics results for both, 2019 and 2018 reporting periods according to the new structure.

 

§ Our adjusted hospital bed occupancy rate6 was at 64.1% in 2Q19 and at 65.6% 1H19 (61.2% and 63.1% in 2Q18 and 1H18, respectively).

 

§ The average length of stay at hospitals7 was at 5.4 days in 2Q19 as well as in 1H19 (5.4 days in 2Q18 and 5.5 days in 1H18).

Income Statement, Hospitals business

GEL thousands; unless otherwise noted

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Hospitals revenue, gross

74,218

67,790

9.5%

148,992

132,080

12.8%

Corrections & rebates

(532)

(867)

-38.6%

(994)

(1,462)

-32.0%

Hospitals revenue, net

73,686

66,923

10.1%

147,998

130,618

13.3%

Costs of hospitals business

(42,640)

(38,875)

9.7%

(85,661)

(75,358)

13.7%

Gross profit

31,046

28,048

10.7%

62,337

55,260

12.8%

Salaries and other employee benefits

(8,157)

(7,235)

12.7%

(16,109)

(14,065)

14.5%

General and administrative expenses excluding IFRS 16

(3,861)

(3,759)

2.7%

(7,288)

(7,086)

2.9%

Impairment of receivables

(1,128)

(1,271)

-11.3%

(2,265)

(2,457)

-7.8%

Other operating income

940

1,639

-42.6%

1,327

2,878

-53.9%

EBITDA excluding IFRS 16

18,840

17,421

8.1%

38,002

34,530

10.1%

EBITDA margin excluding IFRS 16

25.4%

25.7%

 

25.5%

26.1%

 

IFRS 16 impact on EBITDA8

120

-

NMF

299

-

NMF

Depreciation and amortization excluding IFRS 16

(6,728)

(6,771)

-0.6%

(13,244)

(12,342)

7.3%

Depreciation and amortisation

(6,920)

(6,771)

2.2%

(13,599)

(12,342)

10.2%

Net interest income (expense) excluding IFRS 16

(6,586)

(5,844)

12.7%

(13,168)

(10,556)

24.7%

Net interest income (expense)

(6,620)

(5,844)

13.3%

(13,233)

(10,556)

25.4%

Net gains/(losses) from foreign currencies excluding IFRS 16

(1,052)

60

NMF

(1,145)

39

NMF

Net gains/(losses) from foreign currencies

(1,437)

60

NMF

(1,552)

39

NMF

Net non-recurring income/(expense)

(288)

(247)

16.5%

(392)

(1,126)

-65.2%

Profit before income tax expense

3,695

4,619

-20.0%

9,525

10,545

-9.7%

Income tax benefit/(expense)

-

(74)

NMF

-

(74)

NMF

Profit for the period excluding IFRS 16

4,186

4,545

-7.9%

10,053

10,471

-4.0%

Profit for the period

3,695

4,545

-18.7%

9,525

10,471

-9.0%

 

 

 

 

 

 

 

Revenue, hospitals

Our hospitals business y-o-y revenue growth in both reporting periods was mainly driven by the continuing ramp-up of our newly launched hospitals. Our existing facilities also contributed to the overall growth, where the y-o-y occupancy rates were also up 290 bps and 250 bps in 2Q19 and 1H19 respectively.

Progress of our newly opened hospitals

Regional Hospital (fully opened in March 2018) continues its progress and in 2Q19 the hospital posted record high revenue of GEL 9.5 million, up 6.0% q-o-q with the occupancy rate being also up 3.0% for the same period, reaching 38.6%. Positioned as hospital of choice, the Regional Hospital is already in the country's top five largest hospitals by revenue. As planned, the hospital is generating around 60% of its revenue from elective care services, which is reflected in the lower occupancy rates and mostly out--of-pocket source of payment (41.6% of total revenue). The hospital's EBITDA margin reached 17.6% in 2Q19.

Tbilisi Referral Hospital (fully opened in December 2017) posted GEL 5.9 million revenue in 2Q19 (up 43.8% y-o-y; down 7.7% q-o-q) with a 46.9% occupancy rate, and GEL 12.3 million in 1H19 (up 57.4% y-o-y). The quarterly revenue decline is attributable to the temporary discontinuation of several medical services due to technical reasons in 2Q19, out of which most have been already reinstated. The hospital is still in its ramp up phase and over the next few quarters we expect that, by renewing the medical services temporarily discontinued in 2Q19 and adding some new ones, revenue will increase gradually as planned. The hospital posted strong quarterly EBITDA margin of 17.1%, up 110 bps q-o-q.

Revenue by sources of payment

(GEL thousands, unless otherwise noted)

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change, Y-o-Y

Hospitals revenue, net

73,686

66,923

10.1%

147,998

130,618

13.3%

Government-funded healthcare programmes

51,035

45,319

12.6%

102,605

88,182

16.4%

Out-of-pocket payments by patients

17,691

17,157

3.1%

35,387

33,432

5.8%

Private medical insurance companies, of which

4,960

4,447

11.5%

10,006

9,004

11.1%

GHG medical insurance

2,918

1,671

74.6%

5,427

3,377

60.7%

 

All payment sources contributed to our revenue growth, while the Government-funded healthcare programme remains the main contributor, accounting 69.3%9 in total revenue from hospitals business.

Gross profit, hospitals

Cost of hospitals as % of revenue

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Direct salary rate

35.3%

35.6%

-0.3 ppts

34.5%

34.9%

-0.4 ppts

Materials rate

16.5%

16.3%

+0.2 ppts

17.0%

16.4%

+0.6 ppts

 

 

 

 

 

 

 

Gross margin

41.8%

41.4%

+0.4 ppts

41.8%

41.8%

0.0 ppts

               

Despite our two flagships remaining in their roll-out phase, which naturally increases our cost base, in 2Q19 costs were almost in line with net revenue growth rates. Despite the new pension reform (described on page 8 above in more detail) which increased our cost of salaries and other employee benefits by c.2%, as a result of focused efficiency initiatives the direct salary rate was down in 2Q19 and HY19. The increase in the materials rate reflects the roll-out of the new hospitals. Excluding the effect of newly launched hospitals, the materials rate remained well-controlled and stood at 14.9% in 2Q19 (down 60 bps y-o-y) and 15.3% in 1H19 (down 60 bps y-o-y).

As a result, y-o-y the hospitals quarterly gross margin improved by 40 bps y-o-y and remained flat in 1H19, at 41.8%.

Operating expenses, hospitals

On the back of business expansion and the new mandatory pension reform the salaries and other employee benefits increased y-o-y. General and administrative expenses were maintained (excluding IFRS 16 impact) at a favourable level, showing modest y-o-y growth of below 3% in 2Q19 as well as 1H19. 

The decrease in other operating income reflects the transfer of hospitals centralised medicine procurement entity to the GHG pharmacy and distribution business in 2019. In 2Q18 and 1H18 the business also generated higher gain from the sale of PPE than respective periods in 2019.

EBITDA excluding IFRS 16, hospitals

The healthy increase in our quarterly and half year EBITDA reflects the contributions of our two new flagship hospitals, increased demand for current services at our existing facilities and recently implemented efficiency initiatives. Y-o-y EBITDA margins, however, were slightly down, 30 bps in 2Q19 and 60 bps 1H19, and stood at 25.4% and 25.5% respectively. The reduction was mainly due to the new pension reform, that added GEL 0.7 million and GEL 1.4 million in quarterly and half year salary expense and translated in 90 bps reductions in respective EBITDA margins, and the decrease in other operating income explained above. Excluding the dilutive effect of roll-outs, despite the new pension reform, the hospitals business posted strong EBITDA margin of 27.5% in 2Q19 and 27.7% in 1H19.

Profit, hospitals

As the business completed its intensive capital expenditure phase, the depreciation and amortisation expense started to stabilise. On the back of almost flat q-o-q borrowed funds balance the interest expense also remained flat, which is expected to decline over the next periods, as we continue to reduce our debt balance. Foreign currency loss recorded in 2Q19 is the result of a foreign currency exposure, arising from small unhedged portion of USD denominated borrowing from a DFI.

Other highlights:

·      In 2Q19 hospitals business signed a cooperation agreement (the "transaction") with JSC David Davarashvili Clinic, which provides maternity and gynaecology services and is one of the country's leading maternity houses (the "Maternity Clinic"). Under the transaction, the Maternity Clinic will lease an unused 2,400 sq.m space at GHG's referral hospital, Iashvili Tertiary Referral Hospital ("Iashvili Hospital"). Iashvili Hospital is the cornerstone of GHG's neonatal and paediatric services and offers the most comprehensive portfolio of such services in Georgia. The collaboration of these two leading healthcare facilities will form the country's strongest location for all types of neonatal and maternal services, further increasing Iashvili Hospital's patient footprint and occupancy rates. It will also help to strengthen our position in the maternity business where we have low market share. The transaction also represents strong progress towards hospitals business' strategy, to optimise its unused assets and increase the utilisation of its healthcare facilities, further improving the Hospital's return on invested capital. 

 

7 Adjusted to exclude the Tbilisi Referral Hospital and Regional Hospital; the calculation also excludes emergency beds

8 The calculation excludes emergency beds

9  Represents IFRS 16 impact on General and administrative expenses

10 Government funded healthcare programmes revenue share in total revenues from hospitals is higher compared to the same share in revenues from healthcare services that we used to report (which now, due to the split of hospitals and clinics results, are reported separately). This is because UHC mostly covers inpatient services, while the revenue share from government in our clinics business is lower, at 55.1%, due to the limited coverage of outpatient services from UHC that our polyclinics provide

 

Discussion of Clinics Business Results11

Operational highlights:

§ In December 2018 we entered into the Georgian dental market by launching dental clinics in the Group's polyclinics. Currently eight of our polyclinics, located in Tbilisi and in other large cities, house dental offices.

 

§ The number of registered patients in Tbilisi polyclinics has now reached c.172,000 (compared to c.157,000 in March 2019). We aim to further grow our polyclinic business both organically and through further acquisitions.

 

Income Statement, Clinics Business

GEL thousands; unless otherwise noted

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Clinics revenue, gross

10,877

9,963

9.2%

21,984

19,397

13.3%

Corrections & rebates

(73)

(220)

-66.8%

(170)

(318)

-46.5%

Clinics revenue, net

10,804

9,743

10.9%

21,814

19,079

14.3%

Costs of clinics business

(6,223)

(5,521)

12.7%

(12,467)

(10,944)

13.9%

Gross profit

4,581

4,222

8.5%

9,347

8,135

14.9%

Salaries and other employee benefits

(1,783)

(1,647)

8.3%

(3,539)

(3,290)

7.6%

General and administrative expenses excluding IFRS 16

(1,092)

(1,055)

3.5%

(2,174)

(1,957)

11.1%

Impairment of receivables

(15)

(28)

NMF

(90)

(44)

104.5%

Other operating income

216

(116)

NMF

439

(93)

NMF

EBITDA excluding IFRS 16

1,907

1,376

38.6%

3,983

2,751

44.8%

EBITDA margin excluding IFRS 16

17.5%

13.8%

 

18.1%

14.2%

 

IFRS 16 impact on EBITDA12

301

-

NMF

755

-

NMF

Depreciation and amortization excluding IFRS 16

(1,257)

(1,265)

-0.6%

(2,485)

(2,614)

-4.9%

Depreciation and amortisation

(1,664)

(1,265)

31.6%

(3,290)

(2,614)

25.9%

Net interest income (expense) excluding IFRS 16

(998)

(974)

2.5%

(1,955)

(1,954)

0.1%

Net interest income (expense)

(1,126)

(974)

15.6%

(2,212)

(1,954)

13.2%

Net gains/(losses) from foreign currencies excluding IFRS 16

(35)

(3)

NMF

(62)

(7)

NMF

Net gains/(losses) from foreign currencies

(834)

(3)

NMF

(895)

(7)

NMF

Net non-recurring income/(expense)

(15)

(10)

50.0%

(67)

276

NMF

Profit before income tax expense

(1,431)

(876)

63.4%

(1,726)

(1,548)

11.5%

Income tax benefit/(expense)

-

2

NMF

-

-

-

Profit for the period excluding IFRS 16

(398)

(874)

-54.4%

(586)

(1,548)

-62.1%

Profit for the period

(1,431)

(874)

63.8%

(1,726)

(1,548)

11.5%

 

 

Revenue, clinics

Our clinics business also posted strong revenue growth driven by both, the polyclinics double-digit revenue growth as well as community clinics.

Revenue by types of clinics

(GEL thousands, unless otherwise noted)

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Clinics revenue, net

10,804

9,743

10.9%

21,814

19,079

14.3%

Polyclinics

5,692

4,895

16.3%

11,254

9,402

19.7%

Community

5,112

4,848

5.4%

10,560

9,677

9.1%

 

In 1H19, 52% of the clinics' revenue came from polyclinics and 48% from community clinics.

The growth in revenue from polyclinics was fully organic, driven by new service initiatives and increased number of registered patients in Tbilisi, up c.55,000 patients y-o-y in 2Q19, reaching c.172,000 patients as of now. The growth in our polyclinics is also supported by dental clinics - we have opened dental offices in eight different polyclinics since December 2018. We will continue to pursue our polyclinics expansion strategy: to consolidate our position as the largest player in the highly fragmented outpatient market in Georgia through organic growth and further acquisitions.

The y-o-y increase in revenue from community clinics, which play a feeder role for the referral hospitals, was fully organic.

Revenue by sources of payment in clinics

(GEL thousands, unless otherwise noted)

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Healthcare services revenue, net

10,804

9,743

10.9%

21,814

19,079

14.3%

Government-funded healthcare programmes

5,916

5,495

7.7%

12,022

10,781

11.5%

Out-of-pocket payments by patients

2,888

2,895

-0.2%

6,024

5,657

6.5%

Private medical insurance companies, of which

2,000

1,353

47.8%

3,768

2,641

42.7%

GHG medical insurance

1,857

1,154

60.9%

3,446

2,281

51.1%

 

The main contributor to clinics revenue growth was Government-funded healthcare programmes, accounting for a c.55% share in total revenue from clinics in both periods. The slight decline in out-of-pocket payments is attributable to community clinics where the main part of the revenue is generated from UHC, while in our polyclinics revenue the same source of payment was up 2.4% in 2Q19 and up 7.9% 1H19 y-o-y. The strong growth in clinics revenue from private insurance companies is mainly supported by the increased number of GHG insured clients, who prefer to use our polyclinics, due to the different incentives such as direct settlement of claims, and quality of care.

Gross profit, clinics

Cost of clinics as % of revenue

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

 

Direct salary rate

34.8%

35.8%

-1.0 ppts

34.7%

36.1%

-1.4 ppts

 

Materials rate

6.6%

6.7%

-0.1 ppts

6.4%

6.5%

-0.1 ppts

 

 

 

 

 

 

 

 

 

Gross margin

42.1%

42.4%

-0.3 ppts

42.5%

41.9%

0.6 ppts

 

 

Despite the new pension reform, as a result of efficiency and cost control measures the direct salary rate significantly improved y-o-y. The y-o-y decrease in cost of materials rate is partially attributable to redirecting the laboratory tests to Mega Lab, eliminating cost of reagents while increasing the cost of medical service providers for the same period. As the polyclinics progress during their ramp-up phase, the cost of utilities increased y-o-y in both reporting periods. All this translated in slight reduction in quarterly gross margin, while the half year gross margin was up 60 bps, reaching 42.5%.

Operating expenses, clinics

Our focus on efficiency initiatives resulted in only moderate growth in salaries and other employee benefits and in general and administrative expenses (excluding IFRS 16 impact), both favourably lagging respective revenue growth. Other operating income derives mainly from renting the spaces to pharmacies and other minor retailers in our polyclinics. As a result, the clinics business posted strong y-o-y positive operating leverage of 14.5 ppts and 15.3 ppts in 2Q19 and 1H19.

EBITDA excluding IFRS 16, clinics

Increased revenue and the well-controlled cost base translated into strong EBITDA growth for both periods. Clinics business has also significantly improved its EBITDA margin, which was supported by EBITDA margin improvement in polyclinics as a number of them are making progress towards their run rate potential and the base of registered patients continues to increase. The polyclinics' EBITDA margin rose to 16.3% in 2Q19 (up 70 bps y-o-y) and to 15.6% in 1H19 (up 80 bps y-o-y).

Profit, clinics

As a number of polyclinics still remain in their roll-out phase, the clinics contributed negatively to the Group's profit. Currently the main priority of the clinics business remains the polyclinics chain expansion and increasing the base of registered customers, as our polyclinics represent a first point of customer interaction for our overall business, bringing additional referrals to our hospitals and pharmacies. Combined with the newly launched dental offices, we believe that the polyclinics business will become one of the largest sources of future growth, while we expect only moderate growth from the community clinics.

11 Under the Group's new structure, the clinics business results now includes community clinics and polyclinics, explained in more details on page 7

12 Represents IFRS 16 impact on General and administrative expenses

Discussion of Pharmacy and Distribution Business Results

Operating highlights:

§ 279 pharmacies as of June 2019 (259 as of June 2018)

§ Average retail customer interactions per month was c.2.4 in 2Q19 (c.2.2 in 2Q18) and c.2.4 in 1H19 (c.2.2 in 1H18)

§ Average bill size was GEL 14.2 in 2Q19 (GEL 13.0 in 2Q18) and GEL 13.8 in 1H19 (GEL 13.9 in 1H18)

§ c.0.8 million loyalty card members as at 30 June 2019

Income Statement, pharmacy and distribution business

GEL thousands; unless otherwise noted

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Pharmacy and distribution revenue

149,414

127,323

17.4%

295,193

254,191

16.1%

Costs of Pharmacy and distribution

(113,463)

(95,862)

18.4%

(220,944)

(191,412)

15.4%

Gross profit

35,951

31,461

14.3%

74,249

62,779

18.3%

Salaries and other employee benefits

(12,580)

(11,299)

11.3%

(25,244)

(22,493)

12.2%

General and administrative expenses excluding IFRS 16

(9,885)

(8,473)

16.7%

(19,794)

(16,723)

18.4%

Impairment of receivables

(121)

(5)

NMF

(179)

(25)

NMF

Other operating income

1,982

233

NMF

1,876

1,023

83.4%

EBITDA excluding IFRS 16

15,347

11,917

28.8%

30,908

24,561

25.8%

EBITDA margin excluding IFRS 16

10.3%

9.4%

 

10.5%

9.7%

 

IFRS 16 impact on EBITDA13

4,739

-

NMF

9,141

-

NMF

Depreciation and amortization excluding IFRS 16

(738)

(576)

28.1%

(1,426)

(1,124)

26.9%

Depreciation and amortisation

(4,702)

(576)

NMF

(9,240)

(1,124)

NMF

Net interest income (expense) excluding IFRS 16

(2,943)

(2,758)

6.7%

(5,892)

(5,515)

6.8%

Net interest income (expense)

(4,141)

(2,758)

50.1%

(8,193)

(5,515)

48.6%

Net gains/(losses) from foreign currencies excluding IFRS 16

(3,294)

243

NMF

(3,088)

2,129

NMF

Net gains/(losses) from foreign currencies

(6,519)

243

NMF

(6,546)

2,129

NMF

Net non-recurring income/(expense)

(68)

(374)

-81.8%

(62)

(785)

-92.1%

Profit before income tax expense

4,656

8,452

-44.9%

16,008

19,266

-16.9%

Income tax benefit/(expense)

(69)

-

NMF

(69)

-

NMF

Profit for the period excluding IFRS 16

8,235

8,452

-2.6%

20,371

19,266

5.7%

Profit for the period

4,587

8,452

-45.7%

15,939

19,266

-17.3%

 

 

 

 

 

 

 

Revenue, pharmacy and distribution

We enjoyed strong revenue growth in both periods in our retail and distribution businesses as shown in the table below.

Revenue by types, pharmacy and distribution

(GEL thousands, unless otherwise noted)

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Pharmacy and distribution revenue

149,414

127,323

17.4%

295,193

254,191

16.1%

Revenue from Retail

106,024

93,309

13.6%

209,697

188,389

11.3%

Revenue from Distribution

43,390

34,014

27.6%

85,496

65,802

29.9%

 

 

 

 

 

 

 

Gross profit Margin

24.1%

24.7%

-0.6 ppts

25.2%

24.7%

0.5 ppts

 

The increase in y-o-y revenues from retail is attributable to expansion and organic sales growth in the business. Over the last 12 months we have added 20 new pharmacies to our chain. The number of bills issued as well average bill size was up 4.9% and 8.9% in 2Q19, respectively. This translated into a same-store growth rate of 8.0% in 2Q19. The business also posted positive 6.1% same-store growth rate for the half year. The share of para-pharmacy sales in retail revenue further improved to 31.4% in 2Q19 (30.1% in 2Q18) and to 30.3% in 1H19 (29.4% in 1H18).

The pharmacy and distribution business continues to make strong progress in growing wholesale revenue by signing new corporate accounts. Apart from new clients, the distribution revenue growth relates to the transfer of our hospitals' centralised medicine procurement entity ("ELG") to the GHG pharmacy and distribution business wholesale segment in 2019. This resulted increased intercompany sales with GHG hospitals and clinics businesses.

Excluding the ELG sales, y-o-y revenue growth from distribution was 1.8% in 2Q19 and 6.7% in 1H19, translating into pharmacy and distribution business total y-o-y revenue growth of 10.5% and 10.1%, respectively.

Gross profit, pharmacy and distribution

Quarterly gross margin in the pharmacy and distribution business was down 60 bps y-o-y due to the reduced wholesale margin resulting from the increased intercompany sales mentioned above (which is eliminated upon consolidation). Excluding these intercompany sales the quarterly gross margin improved 70 bps. The improvement is partially a result of costs of pharma slightly benefiting from realising previously purchased inventory at a lower foreign currency exchange rate. Though, increased FX rates in 2Q19 increased our payable balances for these inventories, resulting in loss from foreign currencies in the same period.

Apart from the quarterly reasons stated above, half year gross profit margin improvement was driven by the increased margin on non-medication categories (personal care, beauty and other para-pharmacy products), total sales of which were GEL 67.4 million in 1H19 with 30.4% gross profit margin, compared to GEL 57.4 million in 1H18 with 28.7% gross profit margin.

Our gross profit margins also benefited from the increased sales of private label products. Currently, 37 private label medicines are presented in our pharmacies, with annualised revenue contribution of c.GEL 5 million. In May, private label personal care products were also introduced in our pharmacies under the brand name "Attirance", posting around GEL 0.1 million in 2Q19.

Operating expenses, pharmacy and distribution

The business posted y-o-y positive operating leverage of 8.9 ppts in 2Q19 and 4.9 ppts in 1H19. Salaries and other employee benefits, despite the pension reform, favourably lagged behind the same period revenue growth. Apart from business expansion, the y-o-y increase in general and administrative expenses (excluding IFRS 16 impact) is attributable to the marketing activities and promotions to support retail sales growth and increased rent expense of pharmacies (about 85% of rental contracts are denominated in foreign currency) due to the GEL devaluation.

Other operating income at the business increased by GEL 1.7 million, reflecting principally the gain on the sale of unused land and building (see note 26 to the financial statements).

EBITDA and profit, pharmacy and distribution

Our 2Q19 and 1H19 EBITDA margins, at 10.3% and 10.5% respectively, continue to substantially exceed our updated target of 9% (previously 8%+).

Profit, pharmacy and distribution

In 2Q19 interest expense included GEL 0.2 million on the mark to market of the Pharmadepot (the pharmacy and distribution brand acquired in 2017) acquisition holdback (GEL 0.3 million in 2Q18) which is a non-cash expense.

The foreign currency loss reflects the increase in the GEL value of US Dollar and EUR denominated payables to suppliers due to the devaluation of GEL in 2Q19, also explained in more details on page 9, the effect of which is partially mitigated by increased quarterly retail gross margin.

 13Represents IFRS 16 impact on General and administrative expenses 

Discussion of Medical Insurance Business Results

Operating highlights:

§ As at 31 March 2019, business market share based on net insurance premium revenue was 31.1%.

§ In 2019, we became the largest medical insurer in Georgia with c.230,000 insured (c.157,000 in December 2018).

§ Our insurance renewal rate was 81.3% in 2Q19 (70.1% in 2Q18) and 77.5% in 1H19 (71.8% in 1H18).

 

 

Income Statement, medical insurance business

GEL thousands; unless otherwise noted

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Net insurance premiums earned

18,873

13,703

37.7%

36,366

27,005

34.7%

Cost of insurance services

(16,233)

(11,898)

36.4%

(31,916)

(23,792)

34.1%

Gross profit

2,640

1,805

46.3%

4,450

3,213

38.5%

Salaries and other employee benefits

(1,189)

(1,063)

11.9%

(2,106)

(1,846)

14.1%

General and administrative expenses excluding IFRS 16

(469)

(332)

41.3%

(909)

(682)

33.3%

Impairment of receivables

(114)

(61)

86.9%

(217)

(159)

36.5%

Other operating income

355

163

117.8%

567

190

198.4%

EBITDA excluding IFRS 16

1,223

512

138.9%

1,785

716

149.3%

EBITDA margin excluding IFRS 16

6.5%

3.7%

 

4.9%

2.7%

 

IFRS 16 impact on EBITDA14

96

-

NMF

181

-

NMF

Depreciation and amortisation excluding IFRS 16

(191)

(187)

2.1%

(380)

(391)

-2.8%

Depreciation and amortisation

(279)

(187)

49.2%

(548)

(391)

40.2%

Net interest income/ (expense) excluding IFRS 16

186

(11)

NMF

313

(125)

NMF

Net interest income/ (expense)

173

(11)

NMF

286

(125)

NMF

Net gains/(losses) from foreign currencies excluding IFRS 16

8

50

-84.0%

71

88

-19.3%

Net gains/(losses) from foreign currencies

(41)

50

NMF

18

88

-79.5%

Net non-recurring income/(expense)

-

-

-

-

-

-

Profit before income tax expense

1,172

364

222.0%

1,722

288

497.9%

Income tax benefit/(expense)

(203)

(43)

NMF

(288)

(43)

NMF

Profit / (Loss) for the period excluding IFRS 16

1,023

321

218.7%

1,501

245

NMF

Profit / (Loss) for the period

969

321

201.9%

1,434

245

NMF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio (%)

82.6%

82.4%

0.2 ppts

83.9%

83.4%

0.5 ppts

Expense ratio without IFRS 16 (%)

11.9%

15.2%

-3.3 ppts

12.3%

15.4%

-3.1 ppts

Combined ratio without IFRS 16 (%)

94.5%

97.6%

-3.1 ppts

96.1%

98.8%

-2.7 ppts

Revenue, medical insurance

Our medical insurance business posted strong y-o-y double-digit revenue growth, driven by the increased number of new corporate clients. The business started to benefit from the Group's scale that gives us an advantage to offer more competitive prices on the market. Out of new clients, the largest new contract is with the Ministry of Defence ("MOD"), acquired through tender process starting from February 2019. Apart from business growth, the increased number of insured clients further increases our medical insurance claims retention rate within the Group - which, apart from expansion, is the business' main priority.

Gross profit, medical insurance

Medical insurance claims expenses accounts for almost all of the cost of insurance services. In 1H19, our medical insurance claims expense was GEL 30.5 million, of which GEL 12.8 million (41.9% of the total) was inpatient, GEL 12.4 million (40.8% of total) was outpatient and GEL 5.3 million (17.3% of total) was accounted for by drugs. In 2019 loss ratio was slightly up y-o-y (up 20 bps at 82.6% in 2Q19; up 50 bps at 83.9% at 1H19) due to the addition of big clients, such as MOD, having slightly higher loss ratio compared to small corporate clients.

Claims retention rates

Our insurance business expansion has significantly improved claims retention rates within the Group, as the business plays a feeder role in originating and directing patients to our healthcare facilities, mainly to polyclinics and to pharmacies.

 

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

 Total claims retained within the Group

43.0%

38.1%

4.9%

41.1%

38.2%

2.9%

 Total claims retained in outpatient

40.7%

38.4%

2.3%

40.6%

38.5%

2.1%

 

Due to the medical insurance business' increased client base (reaching c.230,000 insured as of June 2019) and new flagship hospital launches in Tbilisi, where our medical insurance business has the highest concentration of its insured clients, more of our medical insurance customers will be utilising our inpatient services. At the same time, with our polyclinics expansion strategy, we expect the retention rate to improve further in the future, on a larger base, providing a significant revenue boost for our clinics and hospitals. Our facilities are increasingly favoured by customers over competitor facilities due to the quality and convenience of our service, access to one-stop-shop style polyclinics and the ease of claim reimbursement procedures.

Operating expenses, medical insurance

Operating expenses growth significantly lagged behind revenue growth, translating into strong positive operating leverage of 36.7 ppts in 2Q19 and 31.8 ppts in 1H19.

Last year, our medical insurance business began participating in the Compulsory Motor Third Party Liability Insurance Programme, effective in the country from 1 March 2018. The profit from this is shown in other operating income. Staring from 2019 the business renegotiated and increased the fee from this service which resulted in y-o-y increase in other operating income.

As a result, y-o-y expense ratio (excluding IFRS 16 impact) was down 330 bps at 11.9% in 2Q19 and down 310 bps at 12.3% in 1H19. Consequently, the combined ratio (excluding IFRS 16 impact) improved by 310 bps to 94.5% in 2Q19 and by 270 bps to 96.1% in 1H19.

14Represents IFRS 16 impact on General and administrative expenses

Discussion of Diagnostics Business Results

Overview, diagnostics

In December 2018, we completed construction and opened Mega Lab, the largest diagnostics laboratory in Georgia and the entire Caucasus region. The multi-disciplinary laboratory is equipped with the most modern infrastructure and state-of-the-art equipment and in addition to basic laboratory tests, the new laboratory allows us to offer complex tests for oncology and molecular lab, some of which have never previously been available in Georgia and for which blood samples used to be sent abroad. The launch is in line with our strategy to invest in and develop new medical services to keep filling existing service gaps in the country, supporting the market's continuing development and our service export strategy.

Mega Lab is an important, separate, business line for the Group, the results of which are shown below in detail. Currently the process of centralising Group's internal lab demand - through collecting samples from the Group's hospitals and polyclinics throughout Georgia - is ongoing and will be completed by September of this year. Test results are distributed electronically to each hospital and polyclinic within the Group through the internal Laboratory Information Management System ("LIMS"), enabling us to be more efficient and provide a reliable service to our patients. Apart from serving the Group facilities, which cover only one-fourth of the laboratory's capacity, Mega Lab started to develop a retail network and capitalise on our pharmacy and distribution business' scale - being the largest retailer in the country. We have already opened a blood collection point in one of our pharmacies in June 2019 and plan to continue the process to arrive at c.50 blood collection points in coming years. The Mega Lab will also work on additional external contracts, serving healthcare facilities outside the Group.

Before opening Mega Lab, most of the Group's healthcare facilities had their own laboratory units and the Group owned one smaller scale lab facility (Patgeo, acquired in 2016). The results below for 2Q18 and 1H18 shows the numbers for Patgeo, which after opening Mega Lab, was fully consolidated into the diagnostics business 2019 results. The Group's healthcare facilities cost base for lab services remained the same with the opening of Mega Lab. Costs previously reflected as salaries and materials (mainly reagents) have simply been shifted to cost of providers.

Operating highlights:

§ Number of patients served in 2Q19 - c.60,000; in 1H19 - c.127,000

§ Number of tests performed in 2Q19 - c.184,000; in 1H19 - c.356,000

§ Average number of tests per patient in 2Q19 - c.3.1; in 1H19 - c.2.8

 

Income Statement, Diagnostics

 

GEL thousands; unless otherwise noted

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Diagnostics revenue

1,131

682

65.8%

2,285

1,378

65.8%

Costs of diagnostics

(774)

(563)

37.5%

(1,605)

(1,077)

49.0%

Gross profit

357

119

NMF

680

301

NMF

Salaries and other employee benefits

(281)

(45)

NMF

(515)

(90)

NMF

General and administrative expenses excluding IFRS 16

(76)

(76)

0.3%

(160)

(132)

21.2%

Impairment of receivables

-

-

-

(4)

-

NMF

Other operating income

49

-

NMF

96

(4)

NMF

EBITDA excluding IFRS 16

49

(2)

NMF

97

75

29.3%

EBITDA margin excluding IFRS 16

4.3%

NMF

 

4.2%

5.4%

 

IFRS 16 impact on EBITDA15

5

-

NMF

11

-

NMF

Depreciation and amortisation excluding IFRS 16

(60)

(47)

27.8%

(119)

(91)

30.8%

Depreciation and amortisation

(67)

(47)

42.7%

(132)

(91)

45.1%

Net interest income/ (expense) excluding IFRS 16

-

-

NMF

-

-

-

Net interest income (expense)

(1)

-

NMF

(1)

-

NMF

Net gains/(losses) from foreign currencies excluding IFRS 16

(14)

1

NMF

(20)

1

NMF

Net gains/(losses) from foreign currencies

(14)

1

NMF

(20)

1

NMF

Net non-recurring income/(expense)

-

(16)

NMF

(5)

(27)

NMF

Profit before income tax expense

(29)

(64)

NMF

(50)

(42)

NMF

Income tax benefit/(expense)

-

-

-

-

-

-

Profit for the period excluding IFRS 16

(26)

(64)

-59.9%

(47)

(42)

11.9%

Profit for the period

 

(29)

(64)

-55.1%

(50)

(42)

19.0%

Revenue by types, diagnostics

(GEL thousands, unless otherwise noted)

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Diagnostics revenue

1,131

682

NMF

2,285

1,378

65.8%

Contracts

1,071

 682

NMF

2,180

 1,378

58.2%

Walk-in

60

  - 

NMF

105

  - 

NMF

 

In 2Q19 and 1H19 well over 90% of our diagnostics business revenue came from contracts, as mentioned above mainly from the Group's hospitals and clinics, by consolidating the demand for planned laboratory tests in Mega Lab. The c.5% of revenue from walk-in patients represents retail revenue which we plan to increase as the business continues to develop retail blood collection points as discussed above.

The diagnostics business continued its positive trend and, as in the first quarter, reached break even EBITDA in 2Q19, a significant achievement for a newly launched segment. The cost base for lab tests are the same as it was for our previously operated separate lab units in our healthcare facilities while the newly added diagnostics business already posts a positive margin due to the reduced cost of tests as a result of consolidation.

15 Represents IFRS 16 impact on General and administrative expenses 

SELECTED FINANCIAL INFORMATION

 

Income Statement, half-year

Hospitals

Clinics

Pharmacy and distribution

Medical insurance

Diagnostics

Eliminations

GHG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GEL thousands, unless otherwise noted

1H19

1H18

Change, Y-o-Y

1H19

1H18

Change, Y-o-Y

1H19

1H18

Change, Q-o-Q

1H19

1H18

Change, Y-o-Y

1H19

1H18

Change, Y-o-Y

1H19

1H18

1H19

1H18

Change, Y-o-Y

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, gross

148,992

132,080

12.8%

21,984

19,397

13.3%

295,193

254,191

16.1%

36,366

27,005

34.7%

2,285

1,378

65.8%

(31,948)

(14,571)

472,872

419,480

12.7%

Corrections & rebates

(994)

(1,462)

-32.0%

(170)

(318)

-46.5%

-

-

-

-

-

-

-

-

-

-

-

(1,164)

(1,780)

-34.6%

Revenue, net

147,998

130,618

13.3%

21,814

19,079

14.3%

295,193

254,191

16.1%

36,366

27,005

34.7%

2,285

1,378

65.8%

(31,948)

(14,571)

471,708

417,700

12.9%

Costs of services

(85,661)

(75,358)

13.7%

(12,467)

(10,944)

13.9%

(220,944)

(191,412)

15.4%

(31,916)

(23,792)

34.1%

(1,605)

(1,077)

49.0%

30,933

13,736

(321,660)

(288,847)

11.4%

Cost of salaries and other employee benefits

(51,430)

(46,069)

11.6%

(7,632)

(7,011)

8.9%

-

-

-

-

-

-

(549)

(478)

14.9%

3,078

2,015

(56,533)

(51,543)

9.7%

Cost of materials and supplies

(25,300)

(21,693)

16.6%

(1,398)

(1,270)

10.1%

-

-

-

-

-

-

(821)

(586)

40.1%

3,042

4,726

(24,477)

(18,823)

30.0%

Cost of medical service providers

(2,107)

(1,760)

19.7%

(2,247)

(1,612)

39.4%

-

-

-

-

-

-

(46)

-

NMF

2,531

1,889

(1,869)

(1,483)

26.0%

Cost of utilities and other

(6,824)

(5,836)

16.9%

(1,190)

(1,051)

13.2%

-

-

-

-

-

-

(189)

(13)

NMF

423

260

(7,780)

(6,640)

17.2%

Net insurance claims incurred

-

-

-

-

-

-

-

-

-

(30,501)

(22,512)

35.5%

-

-

-

7,061

4,846

(23,440)

(17,666)

32.7%

Agents, brokers and employee commissions

-

-

-

-

-

-

-

-

-

(1,415)

(1,280)

10.5%

-

-

-

-

-

(1,415)

(1,280)

10.5%

Cost of pharma - wholesale

-

-

-

-

-

-

(71,214)

(53,303)

33.6%

-

-

-

-

-

-

14,798

-

(56,416)

(53,303)

5.8%

Cost of pharma - retail

-

-

-

-

-

-

(149,730)

(138,109)

8.4%

-

-

-

-

-

-

-

-

(149,730)

(138,109)

8.4%

Gross profit

62,337

55,260

12.8%

9,347

8,135

14.9%

74,249

62,779

18.3%

4,450

3,213

38.5%

680

301

125.9%

(1,015)

(835)

150,048

128,853

16.4%

Salaries and other employee benefits

(16,109)

(14,065)

14.5%

(3,539)

(3,290)

7.6%

(25,244)

(22,493)

12.2%

(2,106)

(1,846)

14.1%

(515)

(90)

NMF

196

552

(47,317)

(41,232)

14.8%

General and administrative expenses

(7,288)

(7,086)

2.9%

(2,174)

(1,957)

11.1%

(19,794)

(16,723)

18.4%

(909)

(682)

33.3%

(160)

(132)

21.2%

228

378

(30,097)

(26,202)

14.9%

Impairment of receivables

(2,265)

(2,457)

-7.8%

(90)

(44)

104.5%

(179)

(25)

NMF

(217)

(159)

36.5%

(4)

-

NMF

443

284

(2,312)

(2,401)

-3.7%

Other operating income

1,327

2,878

-53.9%

439

(93)

NMF

1,876

1,023

83.4%

567

190

198.4%

96

(4)

NMF

149

(381)

4,454

3,613

23.3%

EBITDA excluding IFRS 16

38,002

34,530

10.1%

3,983

2,751

44.8%

30,908

24,561

25.8%

1,785

716

149.3%

97

75

29.3%

1

(2)

74,776

62,631

19.4%

EBITDA margin excluding IFRS 16

25.5%

26.1%

 

18.1%

14.2%

 

10.5%

9.7%

 

4.9%

2.7%

 

4.2%

5.4%

 

 

 

 

 

 

IFRS 16 impact on EBITDA16

299

-

NMF

755

-

NMF

9,141

-

NMF

181

-

NMF

11

-

NMF

-

-

10,387

-

 

EBITDA as per financial statements

38,301

34,530

10.9%

4,738

2,751

72.2%

40,049

24,561

63.1%

1,966

716

174.6%

108

75

44.0%

1

(2)

85,163

62,631

36.0%

     Depreciation and amortization excluding IFRS 16

(13,244)

(12,342)

7.3%

(2,485)

(2,614)

-4.9%

(1,426)

(1,124)

26.9%

(380)

(391)

-2.8%

(119)

(91)

30.8%

-

-

(17,654)

(16,562)

6.6%

Depreciation and amortization   

(13,599)

(12,342)

10.2%

(3,290)

(2,614)

25.9%

(9,240)

(1,124)

NMF

(548)

(391)

40.2%

(132)

(91)

45.1%

-

-

(26,809)

(16,562)

61.9%

     Net interest income (expense) excluding IFRS 16

(13,168)

(10,556)

24.7%

(1,955)

(1,954)

0.1%

(5,892)

(5,515)

6.8%

313

(125)

NMF

-

-

-

-

-

(20,702)

(18,150)

14.1%

Net interest income (expense)

(13,233)

(10,556)

25.4%

(2,212)

(1,954)

13.2%

(8,193)

(5,515)

48.6%

286

(125)

NMF

(1)

-

NMF

-

-

(23,353)

(18,150)

28.7%

     Net gains/(losses) from foreign currencies excluding IFRS 16

(1,145)

39

NMF

(62)

(7)

NMF

(3,088)

2,129

NMF

71

88

NMF

(20)

1

NMF

-

-

(4,244)

2,250

NMF

Net gains/(losses) from foreign currencies

(1,552)

39

NMF

(895)

(7)

NMF

(6,546)

2,129

NMF

18

88

NMF

(20)

1

NMF

-

-

(8,995)

2,250

NMF

Net non-recurring income/(expense)

(392)

(1,126)

-65.2%

(67)

276

NMF

(62)

(785)

-92.1%

-

-

-

(5)

(27)

-81.5%

(1)

-

(527)

(1,662)

-68.3%

Profit before income tax expense

9,525

10,545

-9.7%

(1,726)

(1,548)

11.5%

16,008

19,266

-16.9%

1,722

288

NMF

(50)

(42)

19.0%

-

(2)

25,479

28,507

-10.6%

Income tax benefit/(expense)

-

(74)

NMF

-

-

-

(69)

-

NMF

(288)

(43)

NMF

-

-

-

-

-

(357)

(117)

205.1%

Profit for the period excluding IFRS 16

10,053

10,471

-4.0%

(586)

(1,548)

-62.1%

20,371

19,266

5.7%

1,501

245

512.7%

(47)

(42)

11.9%

-

(2)

31,292

28,390

10.2%

Attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  - shareholders of the Company

7,282

8,256

-11.8%

(620)

(1,502)

-58.7%

12,162

11,234

8.3%

1,501

245

NMF

(47)

(42)

11.9%

-

(2)

20,278

18,189

11.5%

  - non-controlling interests

2,771

2,215

25.1%

34

(46)

NMF

8,209

8,032

2.2%

-

-

-

-

-

-

-

-

11,014

10,201

8.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the period

9,525

10,471

-9.0%

(1,726)

(1,548)

11.5%

15,939

19,266

-17.3%

1,434

245

485.3%

(50)

(42)

19.0%

-

(2)

25,122

28,390

-11.5%

Attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  - shareholders of the Company

6,754

8,256

-18.2%

(1,760)

(1,502)

17.2%

9,193

11,234

-18.2%

1,434

245

485.3%

(50)

(42)

19.0%

-

(2)

15,571

18,189

-14.4%

  - non-controlling interests

2,771

2,215

25.1%

34

(46)

NMF

6,746

8,032

-16.0%

-

-

-

-

-

-

-

-

9,551

10,201

-6.4%

                                                             

 

16Represents IFRS 16 impact on General and administrative expenses

 

 

Income Statement, Quarterly

Hospitals

Clinics

Pharmacy and distribution

Medical insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GEL thousands, unless otherwise noted

2Q19

2Q18

Change, Y-o-Y

1Q19

Change, Q-o-Q

2Q19

2Q18

Change, Y-o-Y

1Q19

Change, Q-o-Q

2Q19

2Q18

Change, Y-o-Y

1Q19

Change, Q-o-Q

2Q19

2Q18

Change, Y-o-Y

1Q19

Change, Q-o-Q

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, gross

74,218

67,790

9.5%

74,774

-0.7%

10,877

9,963

9.2%

11,107

-2.1%

149,414

127,323

17.4%

145,779

2.5%

18,873

13,703

37.7%

17,493

7.9%

 

Corrections & rebates

(532)

(867)

-38.6%

(462)

15.1%

(73)

(220)

-66.8%

(97)

-24.7%

-

-

-

-

-

-

-

-

-

-

 

Revenue, net

73,686

66,923

10.1%

74,312

-0.8%

10,804

9,743

10.9%

11,010

-1.9%

149,414

127,323

17.4%

145,779

2.5%

18,873

13,703

37.7%

17,493

7.9%

 

Costs of services

(42,640)

(38,875)

9.7%

(43,021)

-0.9%

(6,223)

(5,521)

12.7%

(6,244)

-0.3%

(113,463)

(95,862)

18.4%

(107,481)

5.6%

(16,233)

(11,898)

36.4%

(15,683)

3.5%

 

Cost of salaries and other employee benefits

(26,189)

(24,117)

8.6%

(25,241)

3.8%

(3,789)

(3,563)

6.3%

(3,843)

-1.4%

-

-

-

-

-

-

-

-

-

-

 

Cost of materials and supplies

(12,281)

(11,041)

11.2%

(13,019)

-5.7%

(721)

(669)

7.8%

(677)

6.5%

-

-

-

-

-

-

-

-

-

-

 

Cost of medical service providers

(1,095)

(922)

18.8%

(1,012)

8.2%

(1,183)

(817)

44.8%

(1,064)

11.2%

-

-

-

-

-

-

-

-

-

-

 

Cost of utilities and other

(3,075)

(2,794)

10.1%

(3,749)

-18.0%

(530)

(472)

12.3%

(660)

-19.7%

-

-

-

-

-

-

-

-

-

-

 

Net insurance claims incurred

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

(15,587)

(11,294)

38.0%

(14,914)

4.5%

 

Agents, brokers and employee commissions

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

(646)

(604)

7.0%

(769)

-16.0%

 

Cost of pharma - wholesale

-

-

-

-

-

-

-

-

-

-

(37,097)

(27,206)

36.4%

(34,117)

8.7%

-

-

-

-

-

 

Cost of pharma - retail

-

-

-

-

-

-

-

-

-

-

(76,366)

(68,656)

11.2%

(73,364)

4.1%

-

-

-

-

-

 

Gross profit

31,046

28,048

10.7%

31,291

-0.8%

4,581

4,222

8.5%

4,766

-3.9%

35,951

31,461

14.3%

38,298

-6.1%

2,640

1,805

46.3%

1,810

45.9%

 

Salaries and other employee benefits

(8,157)

(7,235)

12.7%

(7,952)

2.6%

(1,783)

(1,647)

8.3%

(1,756)

1.5%

(12,580)

(11,299)

11.3%

(12,664)

-0.7%

(1,189)

(1,063)

11.9%

(917)

29.7%

 

General and administrative expenses

(3,861)

(3,759)

2.7%

(3,427)

12.7%

(1,092)

(1,055)

3.5%

(1,082)

0.9%

(9,885)

(8,473)

16.7%

(9,909)

-0.2%

(469)

(332)

41.3%

(440)

6.6%

 

Impairment of receivables

(1,128)

(1,271)

-11.3%

(1,137)

-0.8%

(15)

(28)

-46.8%

(75)

-80.0%

(121)

(5)

NMF

(58)

108.6%

(114)

(61)

86.9%

(103)

10.7%

 

Other operating income

940

1,639

-42.6%

387

142.9%

216

(116)

NMF

223

-3.1%

1,982

233

NMF

(106)

NMF

355

163

117.8%

212

67.5%

 

EBITDA excluding IFRS 16

18,840

17,421

8.1%

19,162

-1.7%

1,907

1,376

38.6%

2,076

-8.1%

15,347

11,917

28.8%

15,561

-1.4%

1,223

512

138.9%

562

117.6%

 

EBITDA margin excluding IFRS 16

25.4%

25.7%

 

25.6%

 

17.5%

13.8%

 

18.7%

 

10.3%

9.4%

 

10.7%

 

6.5%

3.7%

 

3.2%

 

 

IFRS 16 impact on EBITDA17

120

-

NMF

179

 

301

-

NMF

454

 

4,739

-

NMF

4,402

7.7%

96

-

NMF

85

12.9%

 

EBITDA as per financial statements

18,960

17,421

8.8%

19,341

-2.0%

2,208

1,376

60.5%

2,530

-12.7%

20,086

11,917

68.5%

19,963

0.6%

1,319

512

157.6%

647

103.9%

 

     Depreciation and amortization excluding IFRS 16

(6,728)

(6,771)

-0.6%

(6,516)

3.3%

(1,257)

(1,265)

-0.6%

(1,228)

2.4%

(738)

(576)

28.1%

(688)

7.3%

(191)

(187)

2.1%

(189)

1.1%

 

Depreciation and amortization   

(6,920)

(6,771)

2.2%

(6,679)

3.6%

(1,664)

(1,265)

31.6%

(1,626)

2.4%

(4,702)

(576)

NMF

(4,538)

3.6%

(279)

(187)

49.2%

(269)

3.7%

 

    Net interest income (expense) excluding IFRS 16

(6,586)

(5,844)

12.7%

(6,582)

0.1%

(998)

(974)

2.5%

(957)

4.3%

(2,943)

(2,758)

6.7%

(2,949)

-0.2%

186

(11)

NMF

127

46.5%

 

Net interest income (expense)

(6,620)

(5,844)

13.3%

(6,613)

0.1%

(1,126)

(974)

15.6%

(1,086)

3.7%

(4,141)

(2,758)

50.1%

(4,052)

2.2%

173

(11)

NMF

113

53.1%

 

    Net gains/(losses) from foreign currencies excluding IFRS 16

(1,052)

60

NMF

(93)

NMF

(35)

(3)

NMF

(27)

30.0%

(3,294)

243

NMF

206

NMF

8

50

-84.0%

63

-87.3%

 

Net gains/(losses) from foreign currencies

(1,437)

60

NMF

(115)

NMF

(834)

(3)

NMF

(61)

NMF

(6,519)

243

NMF

(27)

NMF

(41)

50

NMF

59

NMF

 

Net non-recurring income/(expense)

(288)

(247)

16.5%

(104)

176.8%

(15)

(10)

50.0%

(52)

-71.2%

(68)

(374)

-81.8%

6

NMF

-

-

-

-

-

 

Profit before income tax expense

3,695

4,619

-20.0%

5,830

-36.6%

(1,431)

(876)

63.4%

(295)

NMF

4,656

8,452

-44.9%

11,352

-59.0%

1,172

364

222.0%

550

113.1%

 

Income tax benefit/(expense)

-

(74)

NMF

-

-

-

2

NMF

-

-

(69)

-

NMF

-

NMF

(203)

(43)

NMF

(85)

138.8%

 

Profit for the period excluding IFRS 16

4,186

4,545

-7.9%

5,867

-28.6%

(398)

(874)

-54.4%

(188)

112.0%

8,235

8,452

-2.6%

12,136

-32.1%

1,023

321

218.7%

478

114.0%

 

Attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  - shareholders of the Company

2,927

3,749

-21.9%

4,354

-32.8%

(412)

(857)

-51.9%

(208)

98.0%

4,770

4,500

6.0%

7,392

-35.5%

1,023

321

218.7%

478

114.0%

 

  - non-controlling interests

1,259

796

58.2%

1,513

-16.8%

14

(17)

NMF

20

-31.1%

3,465

3,952

-12.3%

4,744

-27.0%

-

-

-

-

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the period

3,695

4,545

-18.7%

5,830

-36.6%

(1,431)

(874)

63.8%

(295)

NMF

4,587

8,452

-45.7%

11,352

-59.6%

969

321

201.9%

465

108.4%

 

Attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  - shareholders of the Company

2,436

3,749

-35.0%

4,317

-43.6%

(1,445)

(857)

68.7%

(315)

NMF

2,326

4,500

-48.3%

6,867

-66.1%

969

321

201.9%

465

108.4%

 

  - non-controlling interests

1,259

796

58.2%

1,513

-16.8%

14

(17)

NMF

20

-31.1%

2,261

3,952

-42.8%

4,485

-49.6%

-

-

-

-

-

 

                                                                 

 

 

 

 

17 Represents IFRS 16 impact on General and administrative expenses

 

 

 

 

Income Statement, Quarterly

Diagnostics

Eliminations

GHG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GEL thousands, unless otherwise noted

2Q19

2Q18

Change, Y-o-Y

1Q19

Change, Q-o-Q

2Q19

2Q18

1Q19

2Q19

2Q18

Change, Y-o-Y

1Q19

Change, Q-o-Q

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, gross

1,131

682

65.8%

1,154

-2.0%

(16,853)

(7,670)

(15,095)

237,660

211,791

12.2%

235,211

1.0%

Corrections & rebates

-

-

-

-

-

-

-

-

(605)

(1,087)

-44.3%

(559)

8.2%

Revenue, net

1,131

682

NMF

1,154

-2.0%

(16,853)

(7,670)

(15,095)

237,055

210,704

12.5%

234,652

1.0%

Costs of services

(774)

(563)

37.5%

(831)

-6.9%

16,170

7,024

14,763

(163,163)

(145,694)

12.0%

(158,497)

2.9%

Cost of salaries and other employee benefits

(260)

(238)

9.2%

(289)

-10.0%

1,660

1,077

1,418

(28,578)

(26,842)

6.5%

(27,955)

2.2%

Cost of materials and supplies

(428)

(318)

34.6%

(393)

8.9%

1,366

2,542

1,676

(12,064)

(9,486)

27.2%

(12,413)

-2.8%

Cost of medical service providers

(45)

-

NMF

(1)

NMF

1,253

989

1,278

(1,070)

(750)

42.7%

(799)

33.9%

Cost of utilities and other

(41)

(7)

NMF

(148)

-72.3%

203

203

220

(3,443)

(3,070)

12.1%

(4,337)

-20.6%

Net insurance claims incurred

-

-

-

-

-

3,775

2,213

3,286

(11,812)

(9,080)

30.1%

(11,628)

1.6%

Agents, brokers and employee commissions

-

-

-

-

-

-

-

-

(646)

(604)

7.0%

(769)

-16.0%

Cost of pharma - wholesale

-

-

-

-

-

7,913

-

6,88518

(29,184)

(27,206)

7.3%

(27,232)

7.2%

Cost of pharma - retail

-

-

-

-

-

-

-

-

(76,366)

(68,656)

11.2%

(73,364)

4.1%

Gross profit

357

119

200%

323

10.5%

(683)

(646)

(332)

73,892

65,010

13.7%

76,155

-3.0%

Salaries and other employee benefits

(281)

(45)

NMF

(234)

20.0%

67

495

129

(23,922)

(20,793)

15.1%

(23,395)

2.3%

General and administrative expenses

(76)

(76)

0.3%

(84)

-9.3%

93

130

135

(15,290)

(13,565)

12.7%

(14,808)

3.3%

Impairment of receivables

-

-

-

(4)

NMF

238

152

205

(1,140)

(1,213)

-6.0%

(1,172)

-2.7%

Other operating income

49

-

NMF

47

4.3%

284

(134)

(135)

3,826

1,793

113.4%

629

NMF

EBITDA excluding IFRS 16

49

(2)

NMF

48

2.2%

(1)

(2)

2

37,365

31,232

19.6%

37,409

-0.1%

EBITDA margin excluding IFRS 16

4.3%

NMF

 

4.2%

 

-

 

 

15.7%

14.7%

 

15.9%

 

IFRS 16 impact on EBITDA19

5

-

NMF

6

-16.7%

-

-

-

5,261

-

NMF

5,126

2.6%

EBITDA as per financial statements

54

(2)

NMF

54

0.0%

(1)

(2)

2

42,626

31,232

36.5%

42,535

0.2%

Depreciation and amortization excluding IFRS 16

(60)

(47)

27.8%

(59)

1.8%

-

-

-

(8,975)

(8,847)

1.4%

(8,679)

3.4%

Depreciation and amortization

(67)

(47)

42.7%

(65)

3.2%

-

-

-

(13,633)

(8,847)

54.1%

(13,177)

3.5%

Net interest income (expense) excluding IFRS 16

-

-

NMF

-

NMF

-

-

-

(10,341)

(9,587)

7.9%

(10,362)

-0.2%

Net interest income (expense)

(1)

-

NMF

-

NMF

-

-

-

(11,715)

(9,587)

22.2%

(11,638)

0.7%

Net gains/(losses) from foreign currencies excluding IFRS 16

(14)

1

NMF

(6)

140.0%

-

-

-

(4,388)

351

NMF

145

NMF

Net gains/(losses) from foreign currencies

(14)

1

NMF

(6)

140.0%

-

-

-

(8,846)

351

NMF

(148)

NMF

Net non-recurring income/(expense)

-

(16)

NMF

(5)

NMF

-

-

(1)

(371)

(656)

-43.5%

(155)

139.3%

Profit before income tax expense

(29)

(64)

-55.1%

(22)

30.6%

(1)

(2)

1

8,062

12,493

-35.5%

17,417

-53.7%

Income tax benefit/(expense)

-

-

-

-

-

-

-

-

(272)

(115)

NMF

(85)

220.0%

Profit for the period excluding IFRS 16

(26)

(64)

-59.9%

(22)

16.6%

(1)

(2)

1

13,019

12,378

5.2%

18,273

-28.8%

Attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

  - shareholders of the Company

(26)

(64)

-59.9%

(22)

16.6%

(1)

(2)

1

8,281

7,647

8.3%

11,995

-31.0%

  - non-controlling interests

-

-

-

-

-

-

-

-

4,738

4,731

0.1%

6,277

-24.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the period

(29)

(64)

-55.1%

(22)

30.6%

(1)

(2)

1

7,790

12,378

-37.1%

17,332

-55.1%

Attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

  - shareholders of the Company

(29)

(64)

-55.1%

(22)

30.6%

(1)

(2)

1

4,256

7,647

-44.3%

11,310

-62.4%

  - non-controlling interests

-

-

-

-

-

-

-

-

3,534

4,731

-25.3%

6,022

-41.3%

                                 

 

 

18 Elimination of cost of pharmaceuticals of the centralised medicine procurement entity (the entity which was transferred from healthcare services business to pharmacy and distribution business) was re-allocated from cost of materials and supplies to cost of pharmaceuticals. This is just a reclassification between the two elimination lines and does not affect either gross profit, EBITDA of net profit of the Group

19 Represents IFRS 16 impact on General and administrative expenses

 

 

 

 

 

Selected Balance Sheet items

Hospitals

Clinics

Pharmacy and distribution

GEL thousands; unless otherwise noted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-Jun -19

30-Jun-18

Change,

Y-o-Y

31-Mar-19

Change,

Q-o-Q

30-Jun -19

30-Jun-18

Change,

Y-o-Y

31-Mar-19

Change,

Q-o-Q

30-Jun -19

30-Jun-18

Change,

Y-o-Y

31-Mar-19

Change,

Q-o-Q

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and bank deposits

2,907

9,172

-68.3%

7,536

-61.4%

283

1,841

-84.6%

616

-54.1%

9,702

5,210

86.2%

7,268

33.5%

Property and equipment, of which

525,783

522,885

0.6%

526,836

-0.2%

113,333

101,774

11.4%

112,850

0.4%

99,506

27,800

257.9%

97,317

2.2%

IFRS 16 impact

1,929

-

 

1,930

 

8,297

-

 

8,322

 

68,902

-

 

65,307

 

Inventory

16,113

14,615

10.2%

17,439

-7.6%

1,106

821

34.7%

1,035

6.9%

138,813

98,208

41.3%

127,512

8.9%

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowed Funds

250,563

240,464

4.2%

246,565

1.6%

35,687

33,140

7.7%

34,592

3.2%

79,489

81,476

-2.4%

91,734

-13.3%

Accounts payable

30,436

26,974

12.8%

31,993

-4.9%

5,637

3,323

69.6%

3,499

61.1%

100,349

60,042

67.1%

81,055

23.8%

Finance lease liabilities

1,984

-

NMF

1,994

-0.5%

9,045

8,051

12.3%

8,615

5.0%

74,066

-

NMF

66,702

11.0%

 

 

 

 

 

 

Selected Balance Sheet items

Medical Insurance

Diagnostics

Eliminations

GHG

GEL thousands; unless otherwise noted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-Jun -19

30-Jun-18

Change,

Y-o-Y

31-Mar-19

Change,

Q-o-Q

30-Jun -19

30-Jun-18

Change,

Y-o-Y

31-Mar-19

Change,

Q-o-Q

30-Jun -19

30-Jun-18

31-Mar-19

30-Jun -19

30-Jun-18

Change,

Y-o-Y

31-Mar-19

Change,

Q-o-Q

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and bank deposits

14,228

10,343

37.6%

12,124

17.4%

87

129

-32.6%

52

67.3%

-

-

-

27,207

26,695

1.9%

27,596

-1.4%

 

Property and equipment, of which

15,939

15,021

6.1%

16,036

-0.6%

14,531

14,187

2.4%

14,415

0.8%

-

-

-

769,092

681,667

12.8%

767,454

0.2%

 

IFRS 16 impact

780

-

 

810

 

-

 

 

9

 

-

-

-

79,908

-

 

76,379

 

 

Inventory

-

 

-

-

-

1,100

538

104.5%

512

114.8%

-

-

-

157,132

114,182

37.6%

146,499

7.3%

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowed Funds

5,651

8,281

-31.8%

5,939

-4.8%

-

-

-

-

-

(2,495)

-

(5,085)

368,895

363,361

1.5%

373,745

-1.3%

 

Accounts payable

-

-

-

-

-

1,014

879

15.4%

937

8.2%

(17,652)

(7,911)

(13,482)

119,784

83,307

43.8%

104,001

15.2%

 

Finance lease liabilities

847

-

NMF

823

2.9%

-

-

-

10

NMF

-

-

-

85,94220

8,051

NMF

78,145

10.0%

 

                                                                               

 

 

 

20 Out of which GEL 77.2 million accounts for IFRS 16 impact

 

Selected ratios and KPIs

2Q19

2Q18

1Q19

 

1H19

1H18

GHG

 

 

 

 

 

 

EPS, GEL excluding IFRS 16

0.06

0.06

0.09

 

0.15

0.14

EPS adjusted21, GEL excluding IFRS 16

0.09

0.06

0.09

 

0.19

0.14

ROIC (%)

12.2%

10.2%

12.3%

 

12.2%

10.4%

ROIC adjusted22 (%)

14.4%

13.8%

14.4%

 

14.4%

13.7%

Group rent expenditure

6,118

4,754

5,896

 

12,014

9,478

of which, pharmacy and distribution business

5,555

4,474

5,325

 

10,880

8,529

Group capex (maintenance)

3,878

2,145

3,184

 

7,062

4,440

Group capex (growth)

7,282

13,555

6,321

 

13,603

36,060

 

 

 

 

 

 

 

Number of employees

16,173

15,544

16,092

 

16,173

15,544

Number of physicians

3,645

3,578

3,635

 

3,645

3,578

Number of nurses

3,425

3,323

3,404

 

3,425

3,323

Nurse to doctor ratio, referral hospitals

0.94

0.93

0.94

 

0.94

0.93

Number of pharmacists

2,983

2,762

2,971

 

2,983

2,762

 

 

 

 

 

 

 

Total number of shares

131,681,820

131,681,820

131,681,820

 

131,681,820

131,681,820

Less: Treasury shares

(2,452,449)

(2,763,916)

(2,777,744)

 

(2,452,449)

(2,763,916)

Shares outstanding

129,229,371

128,917,904

128,904,076

 

129,229,371

128,917,904

Of which:

 

 

 

 

 

 

Total free float

54,110,868

53,799,401

54,154,256

 

54,110,868

53,799,401

Shares held by Georgia Capital PLC

75,118,503

75,118,503

74,749,820

 

75,118,503

75,118,503

 

 

 

 

 

 

 

Hospitals

 

 

 

 

 

 

EBITDA margin excluding IFRS 16

25.4%

25.7%

25.6%

 

25.5%

26.1%

Direct salary rate (direct salary as % of revenue)

35.3%

35.6%

33.8%

 

34.5%

34.9%

Materials rate (direct materials as % of revenue)

16.5%

16.3%

17.4%

 

17.0%

16.4%

Administrative salary rate (administrative salaries as % of revenue)

11.0%

10.7%

10.6%

 

10.8%

10.6%

SG&A rate (SG&A expenses as % of revenue)

5.2%

5.5%

4.6%

 

4.9%

5.4%

 

 

 

 

 

 

 

Number of hospitals

18

18

18

 

18

18

Number of hospital beds

2,967

2,967

2,967

 

2,967

2,967

Hospitals bed occupancy rate23

59.6%

53.6%

62.3%

 

60.9%

56.1%

Hospitals bed occupancy rate, excluding Tbilisi Referral Hospital and Regional Hospital beds23

64.1%

61.2%

67.2%

 

65.6%

63.1%

Regional Hospital bed occupancy rate23

38.6%

N/A

35.6%

 

37.1%

N/A

Tbilisi Referral Hospital bed occupancy rate23

46.9%

34.2%

52.2%

 

49.5%

33.8%

Average length of stay (days)23

5.4

5.4

5.4

 

5.4

5.5

 

 

 

 

 

 

 

Clinics

 

 

 

 

 

 

EBITDA margin excluding IFRS 16

17.5%

13.8%

18.7%

 

18.1%

14.2%

EBITDA margin of polyclinics excluding IFRS 16

16.3%

15.6%

14.6%

 

15.6%

14.8%

Direct salary rate (direct salary as % of revenue)

34.8%

35.8%

34.6%

 

34.7%

36.1%

Materials rate (direct materials as % of revenue)

6.6%

6.7%

6.1%

 

6.4%

6.5%

 

 

 

 

 

 

 

Number of community clinics

19

19

19

 

19

19

Number of community clinics beds

353

353

353

 

353

353

Number of polyclinics

15

16

16

 

15

16

 

 

 

 

 

 

 

Pharmacy and distribution

 

 

 

 

 

 

EBITDA margin excluding IFRS 16

10.3%

9.4%

10.7%

 

10.5%

9.7%

Number of bills issued

7.07mln

6.74mln

7.16mln

 

14.24mln

13.44mln

Average bill size

14.2

13.0

13.7

 

13.8

13.9

Revenue from wholesale as a percentage of total revenue from pharma

29.0%

26.7%

28.9%

 

29.0%

25.9%

Revenue from retail as a percentage of total revenue from pharma

71.0%

73.3%

71.1%

 

71.0%

74.1%

Revenue from para-pharmacy as a percentage of retail revenue from pharma

31.4%

30.1%

29.3%

 

30.3%

29.4%

 

 

 

 

 

 

 

Number of pharmacies

279

259

276

 

279

259

 

 

 

 

 

 

 

Medical insurance

 

 

 

 

 

 

Loss ratio

82.6%

82.4%

85.3%

 

83.9%

83.4%

Expense ratio excluding IFRS 16, of which

11.9%

15.2%

12.6%

 

12.3%

15.4%

Commission ratio

3.4%

4.4%

4.4%

 

3.9%

4.7%

Combined ratio excluding IFRS 16

94.5%

97.6%

97.9%

 

96.1%

98.8%

Renewal rate

81.3%

70.1%

74.4%

 

77.5%

71.8%

 

 

 

 

 

 

 

Diagnostics

 

 

 

 

 

 

EBITDA margin excluding IFRS 16 impact

4.3%

NMF

4.2%

 

4.2%

5.4%

Number of patients served ('000)

60

N/A

67

 

127

N/A

Number of tests performed ('000)

184

N/A

172

 

356

N/A

Average revenue per test GEL

6.1

N/A

6.7

 

6.4

N/A

Average number of tests per patient

3.1

N/A

2.6

 

2.8

N/A

               

 

21 Adjusted for non-recurring items and foreign currency losses

22 Return on invested capital is adjusted to exclude newly launched hospitals and polyclinics that are in roll-out phase

23 Excluding emergency beds

 

Principal risks and uncertainties

 

All principal risks identified by the Board may have an impact on our business strategic objectives. These principal risks are described in the table that follows, together with the relevant strategic business objectives, key risk drivers/trends and the mitigation actions we have taken. It is recognised that the Group is exposed to risks wider than those listed. We disclose those we believe are likely to have the greatest impact on our business at this moment in time and which have been the subject of debate at recent Board, Audit or Clinical Quality and Safety Committee meetings. The order in which the Principal Risks and Uncertainties appear does not denote their order of priority. It is not possible to fully mitigate against all of our risks. Any system of risk management and internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

 

 

Principal Risk/Uncertainty

Key Drivers/Trends

Mitigation

Compliance

 

 

 

The Group operates across the healthcare ecosystem and is subject to a complex spectrum of laws, regulations and codes.

 

The Group operates in an emerging and developing market in which legislation is evolving and there may be further changes which affect the Group's business.

 

Impact

Non-compliance with applicable laws, regulations, codes, authority or regulatory requirements, including those specific to tax, insurance or healthcare, or the settling of disputes or lawsuits, could lead to financial detriment, penalties, increased costs of operations, censure, regulatory investigation and reputational impact.

 

Inadequate record-keeping or documentation of medical matters and patient data could lead to medical or administrative errors and regulatory breaches which could impact our financial performance.

 

There are periodic changes to applicable regulations, including the UHC.

 

Our healthcare service business includes a network of different hospitals and a nationwide chain of polyclinics, each of which must comply with extensive specific requirements, including, documentation processing and maintenance requirements.

 

Regulatory authorities (the Social Services Agency and the State agency for supervision of medical activities) conduct periodic inspections of Group clinics in order to determine compliance with relevant regulatory requirements, and have imposed penalties for errors and non-compliance in the past.

 

The Group is involved in contractual and other disputes and litigation.

 

Georgia's existing anti-monopoly legislation may have an impact on our acquisitions as we will be required to seek prior approval from the Competition Authority to proceed with certain future acquisitions.

 

 

 

 

We engage in constructive dialogue with regulatory and Governmental bodies, where possible, on potential changes to legislation.

 

We have policies, procedures and controls to fulfil our compliance obligations, for example, Infection Control Management, Quality Management, Sentinel Event Management, Waste Management, Fire Safety Management and Radiation Safety Management.

 

We have extensive process management systems in place that aim to ensure that the processes are carried out to a consistent standard and in compliance with Georgian regulatory requirements.

 

Through a team of experienced


practitioners and a quality control unit, we carry out regular internal audits. Their programme and audit results are reviewed by the Clinical Quality and Safety Committee every quarter. Outcomes and changes to process are circulated throughout the Group.

 

Through a Regulatory Risks Unit, we perform a consolidated review of all key regulatory compliance risks within the network of the Group's clinics, analyse and report on findings identified as a result of past inspections carried out by the unit as well as by the Regulatory Authorities, and prepare detailed action plans for individual clinics in order to mitigate risk of future non-compliance.

 

We involve our Legal Department in every material contract, contractual disputes and litigation.

 

The Tax Unit of our Finance Department follows changes in tax legislation and initiatives, checks compliance with respective rules and is involved in contract execution processes.

 

 

 

 

 

 

 

Recruitment and retention of skilled medical practitioners

 

Our performance depends on our ability to recruit and retain high- quality doctors, nurses and other healthcare professionals.

 

The success of our healthcare services depends in part on our ability to recruit, train and retain an appropriate number of highly skilled physicians, nurses, technicians and other healthcare professionals in order to deliver international standards of care, offer greater diversity of services to better satisfy our population's needs, and provide the latest treatments using technologically advanced equipment.

 

Impact

If we are unable to effectively attract, recruit and retain qualified doctors, nurses and other healthcare professionals, our ability to provide efficient and diverse healthcare services and sophisticated treatments and retain and attract new patients, as well as our business and results of operations may be adversely affected.

 

 

 

 

 

 

 

 

There is a shortage of suitably skilled doctors, nurses and other healthcare professionals in Georgia.

 

Our hospital and outpatient network has grown rapidly during the last several years, including 2019, and requires human resources with the skills and experience to service it across a range of specialties.

 

We prioritise investment in recruitment and talent development programmes, training and retention of our professionals. We operate incentive schemes, which for example offer bonuses and enhanced benefits. We have successfully attracted a number of western trained Georgian doctors to our Group and are continuing our efforts to that end.

 

We continue to expand the size of both our nurse college and residency programme and to broaden the specialties covered in order to source specialists in the fields where we have a shortage of doctors. Incentives are offered to graduates of the programme to accept employment within our network.

 

Engagement with medical schools and nursing programmes as well as our scholarship programmes enable us to recruit talented graduates.

 

We are committed to expanding our programmes and increasing our capacity. Talent and training development programmes, have been successful in expanding our specialist capability, enhancing the skills of our experienced specialist doctors and nurses and creating an internal talent pipeline of younger doctors and nurses. We also offer programmes for doctors to study abroad as well as receive on-the-job training by our own specialists and doctors from abroad. We continue to expand our training and development programmes to a larger group of doctors and nurses.

 

       

 

 

Principal Risk/Uncertainty

Key Drivers/Trends

Mitigation

Clinical risk

 

 

 

Hospital acquired infections and communicable diseases at any of our facilities, and especially their epidemic or outbreak, could adversely affect our patients and our business, in common with other healthcare facilities worldwide.

 

If our hospitals fail to carry out accurate and timely prevention activities, or to comply with internationally recognised clinical care and quality standards, previously uninfected people may contract and spread serious communicable diseases. Irrational use of antibiotics or neglecting to follow waste disposal or other clinical protocols could also have social or environmental impacts.

 

 

Safety is a cornerstone of clinical risk management in modern medical facilities and our risk management programme must focus on overall safety in hospitals for patients and for visitors and staff as well.

 

Properly functioning medical equipment is another key to risk management for healthcare facilities worldwide.

 

Impact

 

Failure to diagnose and/or adhere to standards and protocols for hospital associated infectious and communicable diseases could result in:

•     damage to our patients and negatively impact outcome of treatment;

•     decreased patient trust in our services;

•     damage to our reputation which may result in an inability to attract new patients or retain existing patients;

•     claims for damages;

•    escalation of the epidemic or outbreak;

•    creation of bacteria resistant to antibiotics;

•    occupational health hazards for our staff and resulting staffing shortages; and/or

•    operational limitations imposed by our regulators.

 

 

Improper disposal of waste increases these risks and can impact the environment.

 

Failures in patients', visitors' or staff safety may also result in:

 

•     damage to our patients and negatively impact outcome of treatment;

•     decreased patient trust in our services;

•     damage to our reputation which may result in an inability to attract new patients or retain existing patients;

•     claims for damages;

•    occupational health hazards for our staff and resulting staffing shortages; and/or

•    operational limitations imposed by our regulators.

 

Failure to maintain medical equipment could result in:

•    decrease in quality of patient care and safety; and decreased patient trust in our services which may result in an inability to attract new patients or retain existing patients.

 

 

 

 

 

 

 

Our operations involve treatment of patients with a variety of infections and communicable diseases.

Failures in prevention could result in intra-hospital infections, especially in high risk areas such as intensive care units, emergency departments and operating theatres.

 

Infection control and prevention has to cover a variety of our activities, including: clinical practice, cleaning and sterilization, laundry, waste management, rational antibiotic use and protection from communicable diseases. Historical practices in Georgia, including in many of the facilities we have acquired in recent years, are well behind international best practices.

 

 

Hospitals, by nature, are high risk area for injuries. Healthcare workers have a high risk of workplace injuries and illness.

 

 

 

 

Our services involve using high-tech medical equipment which require regular maintenance and monitoring to ensure continuously high standard of patient care and avoid delays in service provision.

 

 

We continue to prioritise and enhance our infection control and prevention (ICP) programme. ICP working groups and multidisciplinary infection control committees are established in the hospitals and in the head office. Infection control nurse position is set up in referral hospitals and specially selected and trained nurses are appointed.

ICP protocols and related standard operating procedures (SOPs) are standardized and implemented networkwide in accordance with national and international recommendations. Databases for hospital acquired infections, antimicrobial resistance (AMR) and antibiotic use have been created and are being used.

 

 

We also continue to work closely with the US Centre for Disease Control and Prevention representatives in South Caucasus (the CDC). CDC experts work closely with the Chief Quality Officer, Chief Medical Officer, Chief Epidemiologist and experienced practitioners responsible for overseeing infection and communicable disease control and prevention at our facilities.

Infection control and prevention is a standing agenda item each time the Clinical Quality and Safety Committee meets (at least quarterly) to review our clinical services and performance, internal governance and controls as well as compliance.

We have implemented strict procedures that adhere to regulations and best practice, including an Environmental and Social Policy, in relation to the proper handling of waste and its safe disposal.

 

We continue to improve the clinical risk management activities and incorporate them in overall risk management.

 

We have developed and implemented personnel safety policy, self-injury reporting system and injured personnel management system, which includes their treatment.

 

Safety is one of our permanent priorities. It implies not only human activities but also safe construction and design of medical facilities. Therefore, our infection control and safety

 

risk assessment principles are worked out and integrated in facility planning, design and construction activities.

 

Members of the Clinical Quality and Safety Committee and the wider Board also perform on-site visits and hold discussions with management to review practices and to discuss quality and safety with key practitioners.

 

Finally, accounting and post-exposure management of incidents is in place and we cover all expenses related to follow-up management and treatment of injured personnel.

 

We have an equipment maintenance and monitoring programme in place, which puts considerable emphasis on activities required for proper functioning of high-tech medical equipment. We regularly work to improve the programme and implement new and more effective approaches to medical equipment maintenance.

 

 

 

 

 

Principal Risk/Uncertainty

Key Drivers/Trends

Mitigation

Concentration of revenue

 

 

 

Our healthcare services business depends on revenue from the Georgian Government and a small number of private insurance providers.

 

Payments by the Government under UHC may be delayed, whilst the private insurance companies we work with may experience financial difficulties and fail, or fail to pay the claims we submit to them for healthcare services provided to patients covered by their services.

 

Impact

Reduction of prices or increased time taken to pay, including delayed payment under the UHC, would affect the revenues, receivables outstanding and profitability of the Group.

 

 

 

 

 

 

 

 

 

 

 

Our ability to obtain favourable prices will depend in part on our ability to maintain good working relationships with private insurance providers and may be impacted by any changes to state-funded healthcare programmes.

 

Government is considering changing reimbursement policy for healthcare services under UHC in 2020. However, exact timeline or effect of such change is not yet known.

 

 

The UHC remains a significant priority for the Government. Government expenditure on healthcare in 2019 is budgeted at GEL 1,146 million, which represents 8.8% of the approved state budget for 2019.

 

We monitor the macroeconomic environment in Georgia and budgetary performance of the Government to assess the forecasted future cash flows from the State.

 

We actively seek to increase our share in the outpatient and planned medical services markets, which are funded either by patients out-of-pocket or by private insurance, thus reducing our dependence on the state insurance programme.

 

Our medical insurance business has won two large tenders close to year end, retaining the country's largest insurance client - the Ministry of Internal Affairs with c.75,000 insured and acquiring a significant new corporate client - the Ministry of Defense with c.60,000 insured. As a result, we expect the number of groups' insured individuals to increase and reach approximately 230,000 in 2019, which will make us the largest insurer in the country.

 

 

Currency and macroeconomic

 

 

 

The Group is exposed to foreign currency risk, as a significant proportion of the medical equipment and pharmaceuticals we purchase is denominated in Dollars and/or Euro but our revenues are in Lari. Our pharmacy leases are also denominated in dollars. 

 

 

A portion of our borrowings, particularly from Development Financial Institutions, is foreign-currency-denominated.

 

The Group also faces macroeconomic risk. There could be developments which have an adverse effect on the country, regional or macro economy such as reduced GDP or significant inflation.

 

 

 

Impact

Depreciation of the Lari against the Dollar and/or Euro and/or negative macroeconomic developments may have an adverse effect on our business including putting adverse pressure on our business model, revenues, financial position and cash flows.

 

There have been significant fluctuations in foreign currency exchange rates during 1H2019 with the Lari eventually depreciating by 6.7% against the Dollar andby 6.0% against the Euro as of 30 June 2019 (compared to prior year end).

 

Average Inflation in 1H2019 was slightly above the target at 3.6%, reflecting an increase in excise tax on tobacco and alcoholic beverages, which contributed by 1.4% in the annual inflation.

 

The Georgian economy continues to perform well with 4.9% estimated real GDP growth in six months of 2019, compared to 5.6% growth in 2018 and a 4.8% growth in 2017 for the respective periods.

 

 

 

We actively monitor market conditions and our currency positions and performs stress and scenario tests in order to assess our financial position and adjust strategy accordingly.

 

Foreign currency exposure is actively hedged by foreign currency forward contracts as well as regular operational decisions.

 

We adjust our prices to reflect the fluctuations in foreign currency exchange rates and reduce their impact where possible. The Group takes into account the volatility of the Lari in pricing discussions with counterparties.

 

In 2019, we remained focused on maintaining mostly local currency borrowings.
 

 

 

 

 

 

 

 

Principal Risk/Uncertainty

Key Drivers/Trends

Mitigation

Information technology and operational

 

 

 

We face information technology and operational risk.

A cyber-attack, security breach or unauthorised access to our systems could cause important or confidential data to be misappropriated, misused, disseminated or lost.

 

In addition, improper access or information misappropriation may lead to insider trading or other illegal actions by employees or others.

 

Software or network disruption may also cause the Group to experience lost revenue, failed customer transactions or non-timely submission of mandatory or other reports.

 

Non-recurring operational risks include incurring loss or unexpected expenses from system failure, human error, fraud or other unexpected events.

 

Impact

Any of the above could lead to disruption of our business and operations, affect patient and customer loyalty, subject us to State and Governmental investigation, litigation, damages, penalties and/or reputational damage.

 

 

 

 

We hold confidential data about our patients and customers given the nature of our healthcare services and must be vigilant to guard data privacy.

 

Cyber security threats are increasing year after year.

 

The Group has expanded and has increasingly complex operations to manage, including the pharmaceutical business acquired in the previous years.

 

In 2017-2018, we have formed an Information and Corporate Security Department at Group level and appointed experienced professionals to it. A strategy and action plan has been defined and set. We thoroughly follow that strategy and each year implement new features and processes that further help decreasing level of the risk.

 

We have completed a centralized, GHG-wide IT infrastructure (hardware and network), that has enhanced the Group's overall information and cyber security level. In 2019 we are upgrading our Firewall and network significantly.

 

We continue to design and implement new business processes and risk management structures to better manage the business and to help mitigate our operational risks.

 

Internal Audit conducts regular reviews of IT controls such as the policies for information storage, availability and access, while updating its assessment of risks and recommendations. Internal Audit reports to the Audit Committee on its findings.

 

 

 

Principal Risk/Uncertainty

Key Drivers/Trends

Mitigation

Regional tensions

 

 

 

The Georgian economy and our business may be adversely affected by regional tensions and instability.

 

The Group's operations are located in, and its revenue is sourced from, Georgia. The Georgian economy is dependent on neighbouring economies, in particular Russia, Turkey, Azerbaijan and Armenia, which are key trading partners.

 

There has been ongoing geopolitical tension, political instability, economic instability and military conflict in the region, which may have an adverse effect on our business and financial position.

 

 

Impact

The prolongation or escalation of political instability, geopolitical conflict, economic decline of Georgia's trading partners and any future deterioration of Georgia's relationship with Russia, including in relation to border and territorial disputes, may have a negative effect on the political or economic stability of Georgia, which in turn may have an adverse effect on our business including putting adverse pressure on our business model, our revenues and our financial position.

 

 

Russia imposed economic sanctions on Georgia in 2006, and conflict between the countries escalated in 2008 when Russian forces crossed Georgian borders and recognised the independence of Abkhazia and the Tskhinvali/South Ossetia regions. Russian troops continue to occupy the regions and tensions between Russia and Georgia persist. The introduction of a preferential trade regime between Georgia and the EU in July 2016 and the European Parliament's approval of a proposal on visa liberalisation for Georgia in February 2017 also intensified tensions between the countries.

 

Russia banned direct flights from July 8, 2019 and recommended to stop selling holiday packages to Georgia. The decision was made in response to the anti-occupation protests in Tbilisi. Risks of further economic sanctions have increased.

 

The ongoing conflict between Russia and Ukraine, and Russia's and Turkey's worsening relations with the US increase uncertainties in the region.

 

There is an ongoing conflict between Azerbaijan and Armenia which impacts the region.

 

 

 

We actively monitor risks related to regional tensions and political instability and develop responsive strategies and action plans.

 

One of the most significant changes in the Georgian export market was a shift away from the Russian market after Russia's 2006 embargo.

 

The ongoing action plan to further diversify tourism revenues will serve well to reduce exposure on Russia.

 

While financial market turbulences and geopolitical tensions affects regional trading partners, Georgia's preferential trading regimes and free trade agreements support the country's efforts to enhance resilience to external shocks.

       

Statement of Directors' Responsibilities

 

We confirm that to the best of our knowledge:

§ The interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 "Interim Financial Reporting", as adopted by the European Union and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group;

 

§ This Results Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months of the financial year and description of principal risks and uncertainties for the remaining six months of the year); and

 

§ This Results Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related parties' transactions and changes therein).

 

The Directors of Georgia Healthcare Group PLC are listed on pages 72 - 73 of the Group's 2018 Annual Report and Accounts.

 

After making enquiries, the Directors considered it appropriate to adopt the going concern basis in preparing this Results Report.

 

By order of the Board

 

William (Bill) Huyett

Nikoloz Gamkrelidze

Chairman

 

Chief Executive Officer

13 August 2019

Consolidated Financial Statements

 

 

CONTENTS

 

Independent Review Report to Georgia Healthcare Group PLC...........................................................................................

Interim Condensed Consolidated Statement of Financial Position.........................................................................................

Interim Condensed Consolidated Statement of Comprehensive Income...............................................................................

Interim Condensed Consolidated Statement of Changes in Equity........................................................................................

Interim Condensed Consolidated Statement of Cash Flows...................................................................................................

 

SELECTED EXPLANATORY NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.Background.

2.Basis of Preparation

3.Summary of Significant Accounting Policies

4.Segment Information

5.Cash and Cash Equivalents

6.Amounts Due from Credit Institutions

7.Insurance Premiums Receivables

8.Receivables from Healthcare Services

9.Property and Equipment

10.Goodwill and Other Intangible Assets

11.Inventory

12.Insurance Contract Liabilities

13.Borrowings

14.Debt securities issued

15.Payables for Share Acquisitions

16.Commitments and Contingencies

17.Equity

18.Healthcare Service and Pharmacy and Distribution Revenue.

19.Net Insurance Premiums Earned

20.Cost of Healthcare Services and Pharmaceuticals.

21.Cost of insurance services and agents' commissions.

22.Net Non-Recurring Expense

23.Share-based Compensation

24.Capital Management

25.Maturity analysis

26.Related Party Transactions

27.Fair Value Measurements

 

INDEPENDENT REVIEW REPORT TO GEORGIA HEALTHCARE GROUP PLC (the "Company")

 

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half yearly financial report for the six months ended 30 June 2019, which comprises the Interim Condensed Consolidated Statement of Financial Position, the Interim Condensed Consolidated Statement of Comprehensive Income, the Interim Condensed Consolidated Statement of Changes in Equity, the Interim Condensed Consolidated Statement of Cash Flows and related notes 1 to 28. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

 

Directors' Responsibilities

The half yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. The condensed set of financial statements included in this half yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

 

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half yearly financial report based on our review.

 

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half yearly financial report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

Ernst & Young LLP

London

13 August 2019

 

Interim Condensed CONSOLIDATED STATEMENT OF financial position

as at 30 JUNE 2019 (unaudited) 

(Thousands of Georgian Lari unless otherwise stated)

 

 

 

Notes

Unaudited

30 June 2019

 

31 December 2018

Assets

 

 

 

 

Cash and cash equivalents

5

15,510

 

36,154

Amounts due from credit institutions

6

11,697

 

11,807

Insurance premiums receivable

7

44,737

 

23,643

Receivables from healthcare services

8

124,050

 

106,841

Receivables from sales of pharmaceuticals

 

18,808

 

20,440

Inventory

11

157,132

 

146,164

Prepayments

 

14,156

 

13,064

Current income tax assets

 

85

 

1,007

Investment in associate

 

3,441

 

3,124

Property and equipment

9

769,092

 

698,037

Goodwill and other intangible assets

10

156,042

 

152,298

Other assets

 

31,060

 

27,927

Total assets

 

1,345,810

 

1,240,506

 

 

 

 

 

Liabilities

 

 

 

 

Accruals for employee compensation

 

26,951

 

26,615

Insurance contract liabilities

12

43,160

 

22,544

Accounts payable

 

119,784

 

105,092

Current income tax liabilities

 

290

 

41

Lease liabilities

 

85,942

 

8,676

Payables for share acquisitions

15

89,916

 

91,474

Borrowings

13

276,055

 

296,817

Debt securities issued

14

92,840

 

93,573

Other liabilities

 

22,771

 

20,643

Total liabilities

 

757,709

 

665,475

 

 

 

 

 

Equity

 

 

 

 

Share capital

17

4,784

 

4,784

Additional paid-in capital

17

6,661

 

4,788

Treasury shares

17

(134)

 

(134)

Other reserves

17

(33,867)

 

(33,335)

Retained earnings

17

540,842

 

532,091

Total equity attributable to shareholders of the Company

 

518,286

 

508,194

Non-controlling interests

 

69,815

 

66,837

Total equity

 

588,101

 

575,031

Total equity and liabilities

 

1,345,810

 

1,240,506

 

The interim condensed consolidated financial statements on pages 35 to 63 were approved by the Board of Directors of Georgia Healthcare Group PLC on 13 August 2019 and signed on its behalf by:

Nikoloz Gamkrelidze                                                                                                  Chief Executive Officer

 

13 August 2019

 

Irakli Gogia                                                                                                              Chief Financial Officer

 

13 August 2019

 

Company registration number: 09752452

 

The accompanying notes on pages 39 to 63 form an integral part of these interim condensed consolidated financial statements.

 

Interim Condensed CONSOLIDATED STATEMENT OF Comprehensive INcome

for the Six month period ended 30 JUNE 2019 (unaudited)

    (Thousands of Georgian Lari unless otherwise stated)

 

 

Notes

Unaudited Period ended 30 June 2019

 

Unaudited Period ended 30 June 2018

Healthcare services revenue

18

160,846

 

143,590

Revenue from pharmacy and distribution

18

274,775

 

247,695

Net insurance premiums earned

19

36,087

 

26,415

Revenue

 

471,708

 

417,700

 

 

 

 

 

Cost of healthcare services

20

(90,659)

 

(78,490)

Cost of sales of pharmaceuticals

20

(206,146)

 

(191,412)

Cost of insurance services and agents' commissions

21

(24,855)

 

(18,945)

Costs of services

 

(321,660)

 

(288,847)

Gross profit

 

150,048

 

128,853

 

 

 

 

 

Other operating income

 

9,132

 

6,946

 

 

 

 

 

Salaries and other employee benefits

 

(47,317)

 

(41,232)

General and administrative expenses

 

(19,927)

 

(26,202)

Impairment of healthcare services, insurance premiums and other receivables

 

(2,312)

 

(2,401)

Other operating expenses

 

(4,461)

 

(3,333)

 

 

(77,961)

 

(73,168)

 

 

 

 

 

EBITDA

 

85,163

 

62,631

 

 

 

 

 

Depreciation and amortisation

 

(26,809)

 

(16,562)

Interest income

 

661

 

592

Interest expense

 

(22,433)

 

(18,612)

Net gains from foreign currencies and currency derivatives

 

(10,576)

 

2,120

Net non-recurring expense

22

(527)

 

(1,662)

Profit before income tax expense

 

25,479

 

28,507

Income tax expense

 

(357)

 

(117)

Profit for the period

 

25,122

 

28,390

 

Other comprehensive loss not to be reclassified to profit or loss in subsequent periods: loss from currency translation difference

 

(40)

 

Total comprehensive income for the year

 

25,082

 

28,390

 

 

 

 

 

 

 

 

 

 

Profit for the year attributable to:

 

 

 

 

- shareholders of the Company

 

15,609

 

18,189

- non-controlling interests

 

9,513

 

10,201

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the year attributable to:

 

 

 

 

- shareholders of the Company

 

15,569

 

18,189

- non-controlling interests

 

9,513

 

10,201

 

 

 

 

 

Earnings per share:

 

 

 

 

- basic earnings per share

17

0.12

 

0.14

- diluted earnings per share

17

0.12

 

0.14

 

The accompanying notes on pages 39 to 63 form an integral part of these interim condensed consolidated financial statements.

interim condensed CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

as at 30 june 2019 (Unaudited) 

(Thousands of Georgian Lari unless otherwise stated)

 

 

Attributable to the shareholders of the Group

 

 

 

 

Share capital

Treasury shares

Additional paid-in capital

Other reserves

Retained earnings

Total

 

Non-controlling interest

 

Total equity

31 December 2017

4,784

(134)

1,708

(26,866)

504,192

483,684

 

64,716

 

548,400

Effect of adoption of IFRS 9

(6,535)

(6,535)

 

(492)

 

(7,027)

1 January 2018

4,784

(134)

1,708

(26,866)

497,657

477,149

 

64,224

 

541,373

Profit for the period

18,189

18,189

 

10,200

 

28,389

Total comprehensive income

18,189

18,189

 

10,200

 

28,389

Acquisition of additional interest in existing subsidiaries

(5,258)

(5,258)

 

1,737

 

(3,521)

Dividends declared to non-controlling interests by subsidiary

 

(9,240)

 

(9,240)

Purchase of treasury shares

(1,751)

(1,751)

 

 

(1,751)

Share-based compensation

2,860

2,860

 

 

2,860

30 June 2018 (unaudited)

4,784

(134)

2,817

(32,124)

515,846

491,189

 

66,921

 

558,110

 

Attributable to the shareholders of the Group

 

 

 

 

Share capital

Treasury shares

Additional paid-in capital

Other reserves

Retained earnings

Total

 

Non-controlling interest

 

Total equity

31 December 2018

4,784

(134)

4,788

(33,335)

532,091

508,194

 

66,837

 

575,031

Profit for the period

15,609

15,609

 

9,513

 

25,122

Other comprehensive income

(40)

(40)

 

 

(40)

Total comprehensive income

(40)

15,609

15,569

 

9,513

 

25,082

Acquisition of additional interest in existing subsidiaries

(492)

(492)

 

(3,121)

 

(3,613)

Acquisition of additional interest in existing subsidiaries by non-controlling shareholders

 

171

 

171

Dilution of interests in subsidiaries

 

1,035

 

1,035

Dividends declared to sharehoders of the Company

(6,858)

(6,858)

 

 

(6,858)

Dividends declared to non-controlling shareholders by subsidiary

 

(4,620)

 

(4,620)

Purchase of treasury shares

(1,582)

(1,582)

 

 

(1,582)

Share-based compensation

3,455

3,455

 

 

3,455

30 June 2019 (unaudited)

4,784

(134)

6,661

(33,867)

540,842

518,286

 

69,815

 

588,101

 

The accompanying notes on pages 39 to 63 form an integral part of these interim condensed consolidated financial statements.

 

Interim condensed CONSOLIDATED STATEMENT of cash flows

for the six month period ended 30 June 2019 (Unaudited)

(Thousands of Georgian Lari unless otherwise stated)

 

 

 

Cash flows from / (used in) operating activities

 

 

 

 

Revenue from healthcare services and medical trials received

 

 141,719

 

128,263

Cost of healthcare services and medical trials paid

 

 (96,879)

 

(83,335)

Revenue from pharmacy and distribution received

 

 276,269

 

248,248

Cost of sales of pharmaceuticals paid

 

 (196,227)

 

(190,682)

Net insurance premiums received

 

 33,841

 

29,355

Cost of insurance services paid

 

 (23,964)

 

(17,947)

Salaries and other employee benefits paid

 

 (47,439)

 

(39,259)

General and administrative expenses paid

 

 (20,432)

 

(29,555)

Acquisition costs paid

 

 (1,342)

 

(1,007)

Other operating income received

 

 3,731

 

2,632

Other operating expenses paid

 

 (3,361)

 

(2,238)

Net cash flows from operating activities before income tax

 

65,916

 

Income tax paid

 

(194)

 

(233)

Net cash flows from operating activities

 

65,722

 

 

 

 

 

 

Cash flows from /(used in) investing activities

 

 

 

 

Acquisition of subsidiaries, net of cash acquired

 

(5,224)

 

(14,565)

Acquisition of additional interest in existing subsidiaries

 

(877)

 

-

Purchase of property and equipment

 

(16,004)

 

(38,319)

Purchase of intangible assets

 

(4,661)

 

(5,537)

Interest income received

 

689

 

592

Invesment in derivative financial instruments

 

(152)

 

-

Loans acquired

 

(1,308)

 

-

Withdrawals of amounts due from credit institutions

 

3,476

 

2,612

Placements of amounts due from credit institutions

 

(2,981)

 

(228)

Proceeds from sale of property and equipment

 

3,837

 

45

Net cash flow used in investing activities

 

(23,205)

 

 

 

 

 

 

Cash flows from / (used in) financing activities

 

 

 

 

Dividends paid to minority shareholders

 

(4,950)

 

(6,270)

Proceeds from borrowings

 

31,496

 

39,014

Repayment of borrowings

 

(59,282)

 

(31,763)

Purchase of treasury shares

 

(1,582)

 

(1,751)

Lease liabilities paid, principal

 

(7,949)

 

-

Lease liabilities paid, interest

 

(2,603)

 

-

Interest expense paid

 

(18,297)

 

(19,608)

Net cash flows (used in)/from financing activities

 

(63,167)

 

 

 

 

 

 

Effect of exchange rates changes on cash and cash equivalents

 

6

 

(776)

Net decrease in cash and cash equivalents

 

(20,644)

 

Cash and cash equivalents, beginning

5

 

Cash and cash equivalents, end

5

 

 

The accompanying notes on pages 39 to 63 form an integral part of these interim condensed consolidated financial statements.

1.     Background

As at 30 June 2019 and 31 December 2018 the ultimate parent of Georgia Healthcare Group PLC ("the Company") and its subsidiaries (together referred to as "GHG" or "the Group") was Georgia Capital PLC ("GCAP"), incorporated in London, England. GCAP's registered legal address is 84 Brook Street, London, W1K 5EH, England. GCAP registration number is 10852406. The remaining 43% is owned by public shareholders. GHG's results are consolidated as part of GCAP's financial statements.

The Group's healthcare services businesses provide medical services to inpatient and outpatient customers through a network of hospitals and clinics throughout Georgia. Its medical insurance business offers a wide range of medical insurance products, including personal accident, term life insurance products bundled with medical insurance and travel insurance policies to corporate and retail clients. The Group's pharmacy and distribution subsidiary, which was acquired in May 2016 and was expanded with JSC ABC Pharmacy acquisition in 2017, offers a wide range of medicines as well as para-pharmacy products.

The legal address of the Company is No. 84 Brook Street, London W1K 5EH, United Kingdom. The Company registration number is 09752452.

As at 30 June 2019 and 31 December 2018 the following shareholders owned more than 3% of the total outstanding shares of the Group. Other shareholders individually owned less than 3% of the outstanding shares.

Shareholder

Unaudited 30 June 2019

 

31 December 2018

Georgia Capital PLC

57%

 

Wellington Management Company

7%

 

T Rowe LTD

7%

 

Others

29%

 

Total

100%

 

100%

 

1.          Background (continued)

The Group included the following subsidiaries and associates incorporated in Georgia:

 

Ownership/Voting

 

 

 

 

Subsidiary

30-Jun-2019

31-Dec-2018

Industry

Date of incorporation

Date of acquisition

Legal address

JSC Georgia Healthcare Group

100%

100%

Healthcare

29-Apr-15

Not Applicable

#142, A. Beliashvili str, Tbilisi

    JSC GEPHA

67%

67%

Pharmacy and Distribution

19-Oct-95

4-May-16

#142, A. Beliashvili str, Tbilisi

             LLC ABC Pharmalogistics

67%

67%

Pharmacy and Distribution

24-Feb-04

6-Jan-17

Peikrebi str. 14a, Tbilisi, Georgia

             LLC ABC Pharmacia (Armenia)

67%

67%

Pharmacy and Distribution

28-Dec-13

6-Jan-17

Kievyan Str. 2/8, Erevan, Armenia

    JSC Insurance Company Imedi L

100%

100%

Insurance

1-Aug-14

31-Jul-14

Anna Politkovskaia str. 9, Tbilisi, Georgia

    JSC Evex Hospitals*

100%

100%

Healthcare

1-Aug-14

1-Aug-14

#142, A. Beliashvili str, Tbilisi

         GNCo

50%

50%

Healthcare

4-Jun-01

5-Aug-15

 Chavchavadze ave. 16, Tbilisi, Georgia

             LLC Nefrology Development Clinic Centre

40%

40%

Healthcare

28-Sep-10

5-Aug-15

Tsinandali str. 9, Tbilisi, Georgia

             High Technology Medical Centre, University Clinic

50%

50%

Healthcare

16-Apr-99

5-Aug-15

Tsinandali str. 9, Tbilisi, Georgia

         LLC Regional Hospital

99.8%

99.8%

Healthcare

12-Jan-12

30-Jun-15

Kavtaradze str. 23, Tbilisi, Georgia

         LLC Evex-Logistics

100%

100%

Healthcare

13-Feb-15

Not Applicable

#142, A. Beliashvili str, Tbilisi

         LLC Referral Centre of Pathology**

100%

Healthcare

29-Dec-14

Not Applicable

Vazha-Pshavela Ave. 40, Tbilisi, Georgia

         JSC Kutaisi County Treatment and Diagnostic Centre for Mothers and Children

67%

67%

Healthcare

5-May-03

29-Nov-11

Djavakhishvili str. 85, Kutaisi, Georgia

         LLC Academician Z. Tskhakaia National Centre of Intervention Medicine of Western Georgia

67%

67%

Healthcare

15-Oct-04

29-Nov-11

A Djavakhishvili str. 83A, Kutaisi, Georgia

         NCLE Evex Learning Centre

100%

100%

Other

20-Dec-13

20-Dec-13

 Javakhishvili str. 83a, Tbilisi, Georgia

         LLC Catastrophe Medicine Paediatric Centre

85%

100%

Healthcare

18-Jun-13

1-Mar-15

U. Chkeidze str. 10, Tbilisi, Georgia

         LLC Emergency Service

100%

Healthcare

28-Jul-09

20-May-16

D. Uznadze str. 2, Tbilisi, Georgia

         JSC Patgeo

100%

100%

Healthcare

13-Jan-10

1-Aug-16

Mukhiani, II mcr. District, Building 22, 1a, Tbilisi, Georgia

         JSC Pediatry

76%

76%

Healthcare

5-Sep-03

6-Jul-16

U. Chkeidze str. 10, Tbilisi, Georgia

         LLC Evex-Collection**

100%

Healthcare

25-Mar-16

Not Applicable

Vazha-Pshavela Ave. 40, Tbilisi, Georgia

         LLC New Clinic

100%

100%

Healthcare

3-Jan-17

20-Jul-17

#142, A. Beliashvili str, Tbilisi

    JSC Evex Clinics*

100%

Healthcare

1-Apr-19

Not Applicable

#142, A. Beliashvili str, Tbilisi

         LLC Aliance Med

100%

100%

Healthcare

7-Jul-15

20-Jul-17

#142, A. Beliashvili str, Tbilisi

JSC Polyclinic Vere

97.8%

97.8%

Healthcare

22-Nov-13

25-Dec-17

Kiacheli str. 18-20, Tbilisis Georgia

          LLC New Dent****

75%

N/A

Healthcare

24-Dec-18

Not Applicable

Vazha-Pshavela Ave. 40, Tbilisi, Georgia

          LLC Tskaltubo Regional Hospital

67%

67%

Healthcare

29-Sep-99

29-Nov-11

Eristavi str. 16, Tskhaltubo, Georgia

    JSC Mega-Lab***

92%

100%

Healthcare

6-Jun-17

Not Applicable

Petre Kavtaradze str. 23, Tbilisi Georgia

   JSC Vabaco

67%

67%

Software Development

9-Sep-13

28-Sep-18

Bochorishvili str. 37, Tbilisi, Georgia

 

Ownership/Voting

 

 

 

 

Associate

30-Jun-2019

31-Dec-2018

Industry

Date of incorporation

Date of acquisition

Legal address

LLC 5th Clinical Hospital

35%

35%

Healthcare

16-Sep-99

4-May-16

Temka, XI mcr. Block 1, N 1/47, Tbilisi, Georgia

NPO Healthcare Association

25%

33%

Healthcare

25-Mar-16

Not Applicable

Vazha-Pshavela Ave.  27b, Tbilisi, Georgia

NPO Georgian Medical Tourism Council****

14.3%

-

Healthcare

16-May-19

Not Applicable

I-II floor, house N10, N 13, b. N1 almond

Gardens Street, tskneti, Vake district, Tbilisi

                   

*    Starting from 2019 the Group has updated its business structure. The healthcare services business was divided into two segments: clinics, which include polyclinics and community clinics, and hospitals which include referral hospitals. As a result of this demerger, JSC Evex Medical Corporation was renamed to JSC Evex Hospitals. New legal entity, JSC Evex Clinics was formed and it operates as separate business line.

**   Subsidiaries were merged with JSC Medical Corporation EVEX in 2018 (the group purchased non-controlling interest in JSC St. Nicholas Surgery Clinic and it became 100% shareholder of the entity before the merger)

***  In 2019, 8.025% shareholdeing interest with book value of GEL 1,035 was transferred to minority shareholder in exchange for acquisition of laboratory information management system ("LIMS") together with supporting technology and applicable licenses.

**** The entities were established in 2019 year. Establishment of New Dent resulted in injection of GEL 159 equity by non-controlling interest shareholder.

2.     Basis of Preparation

Basis of preparation

The financial information set out in these interim condensed consolidated financial statements does not constitute the Group's statutory financial statements within the meaning of section 434 of the Companies Act 2006. Those financial statements were prepared for the year ended 31 December 2018 under IFRS, as adopted by the European Union and have been reported on by GHG's auditors and delivered to the Registrar of Companies. The auditor's report was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The interim condensed consolidated financial statements for the six months period ended 30 June 2018 have been prepared in accordance with International Accounting Standard (IAS) 34 "Interim Financial Reporting", as adopted by the European Union and the Disclosure and Transparency Rules of the Financial Conduct Authority. The Group's annual financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union.

2.       Basis of Preparation (continued)

Basis of preparation (continued)

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual consolidated financial statements. The interim condensed consolidated financial statements should be read in conjunction with the Group's annual consolidated financial statements as at and for the year ended 31 December 2018, signed and authorised for release on 2 April 2019.

The preparation of the interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported income and expense, assets and liabilities and disclosure of contingencies at the date of the interim condensed consolidated financial statements. Although these estimates and assumptions are based on management's best judgement at the date of the interim condensed consolidated financial statements, actual results may differ from these estimates.

These interim condensed consolidated financial statements are presented in thousands of Georgian Lari ("GEL"), except per share amounts and unless otherwise indicated.

The interim condensed consolidated financial statements are unaudited but have been reviewed by the auditors and their review opinion is included in this report.

Going concern

GHG's Board of Directors has made an assessment of the Group's ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future for a period of at least 12 months from the approval of the interim condensed consolidated financial statements. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern. Therefore, the interim condensed consolidated financial statements continue to be prepared on the going concern basis.

3.     Summary of Significant Accounting Policies

New standards, interpretations and amendments adopted by the Group

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2018, except for the adoption of new standards effective as of 1 January 2019. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

The Group applies, for the first time, IFRS 16 Leases that requires either retrospective approach, which implies restating comparatives as if IFRS 16 was always applied or modified retrospective approach, which implies leaving comparatives as previously reported and recognizing any difference between asset and liability in opening retained earnings as at 1 January 2019. The Group chose to apply modified retrospective approach. Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the interim condensed consolidated financial statements of the Group.

IFRS 16 Leases

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease,  SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model.

Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the Group is the lessor.

The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option ('shortterm leases') for emergency cars only, all of which are leased for exactly 12 months period. The Group also elected to use exemption for lease contracts for which the underlying asset is of low value ('low-value assets'). Besides, the Group decided to apply the practical expedient and exclude initial direct costs upon initial application of IFRS 16.

The effect of adoption IFRS 16 is as follows:

3. Summary of significant accounting policies (continued)

New standards, interpretations and amendments adopted by the Group (continued)

Impact on the statement of financial position (increase/(decrease)) as at 1 January 2019:

 

Amount, GEL

Assets

 

Propery and Equipment

76,172

Total assets

76,172

 

 

Liabilities

Lease liabilities

76,172

Total liabilities

76,172

 

 

Impact on the statement of profit or loss (increase/(decrease)) for the six months ended 30 June 2019:

 

Amount, GEL

Ocupancy and rent (Included in general and administrative expenses)

10,171

Other operating income

260

Other operating expense

(44)

EBITDA

10,387

Depreciations and amortisation

(9,155)

Interest expense

(2,651)

Net gains (losses) from foreign currencies

(4,751)

Profit for the period

(6,170)

 

 

Attributable to:

- shareholders of the Company

(4,707)

- non-controlling interests

(1,463)

Impact on the statement of cash flows (increase/(decrease)) for the six months ended 30 June 2019:

 

Amount, GEL

Net cash flows from operating activities

10,552

 

 

Net cash flows from financing activities

(10,552)

There is no material impact on other comprehensive income. The basic and diluted EPS would were decreased by GEL 0.03 each for the period ended 30 June 2019.

The difference of GEL 4,586 between operating lease commitments as of 31 December 2018 and IFRS 16 adoption impact results from short-term and low-value leases on which the Group has applied exemptions detailed above.

a) Nature of the effect of adoption of IFRS 16

Before the adoption of IFRS 16, the Group classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. A lease was classified as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset to the Group; otherwise it was classified as an operating lease. Finance leases were capitalised at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments were apportioned between interest (recognised as finance costs) and reduction of the lease liability. In an operating lease, the leased property was not capitalised and the lease payments were recognised as rent expense in the statement of profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognised under Prepayments and Trade and other payables, respectively. Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for all leases that it is the lessee, except for short-term leases of emergency cars and leases of low-value assets. The Group recognised lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. In accordance with the modified retrospective method of adoption, the Group did not restate comparative information upon adoption. Additionally, there were no differences between assets and liabilities to be recognised in opening retained earnings as at the adoption date. As at 1 January 2019:

·      Property and equipment of GEL 76,172 were recognised and presented separately in the statement of financial position. Lease assets recognised previously under finance leases of GEL 8,761 and included under Property, plant and equipment were derecognised.

·      Finance lease liabilities of GEL 76,172 were recognised.

3. Summary of significant accounting policies (continued)

New standards, interpretations and amendments adopted by the Group (continued)

a) Nature of the effect of adoption of IFRS 16 (continued)

For the six months ended 30 June 2019:

·      Depreciation expense increased by GEL 9,155 relating to the depreciation of additional assets recognised.

·      General and administrative expenses decreased by GEL 10,171 relating to previous operating leases.

·      Interest expense increased by GEL 2,651 relating to the interest expense on additional lease liabilities recognised.

·      The Group recognised net loss from foreign currencies of GEL 4,751 relating to revaluation of finance lease liabilities denominated in foreign currencies.

·      Cash outflows from operating activities decreased by GEL 10,552 and cash outflows from financing activities increased by the same amount, representing the payments for the principal and interest portion of recognised lease liabilities.

b) Summary of new accounting policies Set out below are the new accounting policies of the Group upon adoption of IFRS 16:

Right-of-use assets

The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are initially recognised at cost and are subsequently measured at fair value, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.

Finance Lease liabilities

At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including insubstance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the Group uses the incremental borrowing rate at  the lease commencement date if the interest rate implicit in the lease is not readily determinable. After  the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or  a change in the assessment to purchase the underlying asset.

Short-term leases and leases of low-value assets

The Group applies the short-term lease recognition exemption to its short-term leases of emergency cars (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value (i.e., below USD 5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.

3. Summary of significant accounting policies (continued)

New standards, interpretations and amendments adopted by the Group (continued)

b) Summary of new accounting policies Set out below are the new accounting policies of the Group upon adoption of IFRS 16: (continued)

Significant judgement in determining the lease term of contracts with renewal options

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change  in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy). The Group analyzed its lease contracts and established the following: all contracts, including contracts to lease drug-stores, polyclinics and office spaces, contain either monetary or economic penalties over the entire contract term. In most of the cases, in case of cancellation by the lessor there is a monetary penalty requiring it to repay the lessee all amounts initially spent on leasehold improvements. In virtually all cases, there is an economic penalty for both parties upon cancellation of a lease contract. For the lessee of a drug-store or policlinic, the economic penalty is the significant time and effort involved in finding a new location and making leasehold improvements to fit the new location to the specific needs of the drug-store or policlinic. In case of office space, the economic penalty to the lessee is the significant time, effort and cost related to relocation of an office and its infrastructure. For the lessor, the economic penalty is forgoing a stable relationship with creditworthy lessee and potentially lost income during a vacancy period in which a new tenant is sought.  In practical terms, based on the Group's historical statistical information, the abovementioned monetary and economic penalties translate into stable relationships and lease contracts that are prematurely cancelled in only under 1% of cases. Based on the above consideration, the Group concluded that it is appropriate to define the lease term as the period of the entire contract term, since even if monetary penalties are prescribed only on a portion of lease term, economic penalties apply to the entire contract period.

 

In case there is an option to extend the lease term and the lessee is reasonably certain to exercise the option, the Group also takes the extension into account while defining the lease term. The Group analyzed its contracts and in a number of cases, there was an automatic prolongation of contract in case the contract expired and neither party expressed willingness to cancel. In such cases contracts prescribed the exact term by which the contract should be extended. The terms by which specific contracts are automatically extended are based on the Group's operation department's judgment of how much more time they are planning to lease property in case the lease term is automatically extended. Therefore, the Group concluded that it is appropriate to define the lease term in this case to include the period over which the contract was automatically extended as this represents the operation department's best estimate of expected use of the leased asset.

 

Non-refundable taxes related to lease contracts

 

The Group also considered its approach to value added tax ("VAT") related to lease payments. Since a significant portion of the healthcare business is non subject to VAT, the Group does not a get refund from the state for the VAT paid on lease payments. Therefore, the Group considered whether the non-refundable VAT should be added to monthly lease payments and discounted together with the base amount to form the part of the right of use asset, however after analyzing the IFRS literature the Group concluded that it is appropriate to exclude the VAT and account for separately as an expense even though it is non-refundable.

Lease payments

 

There are some cases when, apart from the contractual fixed payments, there are contractual variable payments as well. In accordance with IFRS 16, lease payments should not include any variable payments that do not depend on either index or rate. For example, if variable rent depends on performance, it should be excluded from lease payments. After analyzing its contracts, the Group identified a number of agreements that included payments that related to utilities, marketing and that depended on revenues. Since those payments are variable, and they do not depend on any index or rate, the Group concluded that it is appropriate to exclude them from lease payments.

3. Summary of significant accounting policies (continued)

New standards, interpretations and amendments adopted by the Group (continued)

c) Amounts recognised in the statement of financial position and profit or loss IFRS 16.53

Set out below, are the carrying amounts of the Group's right-of-use assets and lease liabilities and the movements during the period:

 

 

Right-of-use assets

 

Lease liabilities

1 January 2019

76,172

 

76,172

Net additions

12,891

 

12,891

Depreciation expense

(9,155)

 

-

Interest expense

-

 

2,651

Net losses from foreign currencies

-

 

4,751

Payments

-

 

(10,552)

Other

-

 

31

As at 30 June 2019

79,908

 

85,944

 

IFRIC Interpretation 23 Uncertainty over Income Tax Treatment 

The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty - that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope  of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following:

•      Whether an entity considers uncertain tax treatments separately

•      The assumptions an entity makes about the examination of tax treatments by taxation authorities

•      How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits  and tax rates

•      How an entity considers changes in facts and circumstances

An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty needs to be followed. 

The Group applies significant judgement in identifying uncertainties over income tax treatments. Since the Group operates in a complex multinational environment, it assessed whether the Interpretation had an impact on its consolidated financial statements.  Upon adoption of the Interpretation, the Group considered whether it has any uncertain tax positions, particularly those relating to transfer pricing. The Company's and the subsidiaries' tax filings in different jurisdictions include deductions related to transfer pricing and the taxation authorities may challenge  those tax treatments. The Group determined, based on its tax compliance and transfer pricing study, that  it is probable that its tax treatments (including those for the subsidiaries) will be accepted by the taxation authorities. The interpretation did not have an impact on the consolidated financial statements of the Group.

3. Summary of significant accounting policies (continued)

New standards, interpretations and amendments adopted by the Group (continued)

Amendments to IFRS 9: Prepayment Features with Negative Compensation

Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are 'solely payments of principal and interest on the principal amount outstanding' (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes  the SPPI criterion regardless of an event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of  the contract. These amendments had no impact on the consolidated financial statements of the Group.

Amendments to IAS 19: Plan Amendment, Curtailment or Settlement 

The amendments to IAS 19 address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to determine the current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event. An entity is also required to determine the net interest for the remainder of the period after the plan amendment, curtailment or settlement using the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event, and the discount rate used to remeasure that net defined benefit liability (asset).

These amendments had no impact on the consolidated financial statements of the Group as it did not have any plan amendments, curtailments, or settlements during the period.

Amendments to IAS 28: Long-term interests in associates and joint ventures

The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests.

The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28 Investments in Associates and Joint Ventures.  These amendments had no impact on the consolidated financial statements as the Group does not have longterm interests in its associate and joint venture.

Annual Improvements 2015-2017 Cycle

IFRS 3 Business Combinations 

The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies  the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation.

An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted.  These amendments had no impact on the consolidated financial statements of the Group as there is no transaction where a joint control is obtained.

IFRS 11 Joint Arrangements 

A party that participates in, but does not have joint control of, a joint operation might obtain joint control  of the joint operation in which the activity of the joint operation constitutes a business as defined in IFRS 3.  The amendments clarify that the previously held interests in that joint operation are not remeasured.

An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted.  These amendments had no impact on the consolidated financial statements of the Group as there is no transaction where a joint control is obtained.

IAS 12 Income Taxes

The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income  or equity according to where it originally recognised those past transactions or events.

3. Summary of significant accounting policies (continued)

New standards, interpretations and amendments adopted by the Group (continued)

IAS 12 Income Taxes (continued)

An entity applies the amendments for annual reporting periods beginning on or after 1 January 2019, with early application permitted. When the entity first applies those amendments, it applies them to the income  tax consequences of dividends recognised on or after the beginning of the earliest comparative period. Since the Group's current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Group.

IAS 23 Borrowing Costs 

The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete.

The entity applies the amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity applies those amendments  for annual reporting periods beginning on or after 1 January 2019, with early application permitted. Since the Group's current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Group.

4.     Segment Information

During 2019 year, the Group broke down the Healthcare Services segment in three sub-segments: Referral Hospitals, Clinics and Diagnostics business. The change was implemented in line with the Group's updated business model. Comparative segment information has been restated accordingly. For management purposes, the Group is now organised into five operating segments based on the products, services and target market segment - Referral Hospitals, Clinics, Diagnostics, Pharmacy and Distribution and Medical insurance. All revenues of the Group result from Georgia, except from an immaterial amount of pharmacy sales in Armenia.

Referral hospitals represent large hospitals providing inpatient and outpatient medical services and are owned by the Group throughout the whole Georgian territory.

Clinics represent smaller hospitals providing mainly outpatient medical services and are owned by the Group throughout the whole Georgian territory.

Diagnostics represent various lab services rendered by high-technology business equipped with modern machinery.

Medical insurance comprises a wide range of medical insurance products, including personal accident insurance, term life insurance products bundled with medical insurance and travel insurance policies, which are offered by the Company's wholly owned subsidiary Imedi L.

Pharmacy and distribution comprises a wide range of drugs and parapharmacy products which are offered through a chain of well-developed drug-stores by the Company's subsidiary JSC GEPHA.

Management monitors the operating results of each of the business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance, as in the table below, is measured in the same manner as profit or loss in the consolidated financial statements. Corporate center costs are allocated to segments.

More than 20% of the Group's revenue is derived from the State. However, management believes that the government cannot be considered as a single client, because the customers of the Group are the patients that receive medical services and not the counterparties that pay for these services. Therefore, no revenue from transactions with a single external customer amounted to 10% or more of the Group's total revenue in the period ended 30 June 2019 or 30 June 2018.

Selected items from the statement of financial position as at 30 June 2019 and 31 December 2018 by segments are presented below:

 

 

 

30 June 2019 Unaudited

 

Referral Hospitals

Clinics

Pharmacy and Distribution

Medical Insurance

Diagonstics

Intersegment transactions and consolidation

Total

Assets:

 

 

 

 

 

 

 

 Property and equipment

 Inventory

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 Accounts payable

 Lease liabilities

4. Segment Information (continued)

 

 

 

31 December 2018

 

Referral Hospitals

Clinics

Pharmacy and Distribution

Medical Insurance

Diagonstics

Intersegment transactions and consolidation

Total

Assets:

 

 

 

 

 

 

 

 Property and equipment

 Inventory

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 Accounts payable

 Lease liabilities

 

Statement of comprehensive income as at 30 June 2019 by segments are presented below:

 

 

 

Period ended 30 June 2019 Unaudited

Referral Hospitals

Clinics

Pharmacy and Distribution

Medical Insurance

Diagonstics

Intersegment transactions and consolidation

Total

Healthcare services revenue

Revenue from pharma

Net insurance premiums earned

Revenue

 147,998

 

 

 

 

 

 

 

 

Cost of healthcare services

Cost of sales of pharmaceuticals

Cost of insurance services and agents' commissions

Costs of services

 (85,661)

 (12,467)

 (220,944)

 (31,916)

 (1,605)

 30,933

 (321,660)

Gross profit

 62,337

 9,347

 74,249

 4,450

 680

 (1,015)

 150,048

 

 

 

 

 

 

 

 

Other operating income

 

 

 

 

 

 

 

 

Salaries and other employee benefits

General and administrative expenses

Impairment of healthcare services, insurance premiums and other receivables

Other operating expenses

 

 (32,171)

 (5,211)

 (37,614)

 (3,144)

 (690)

 4,813

 (74,017)

 

 

 

 

 

 

 

 

EBITDA

 38,301

 4,738

 40,049

 1,966

 108

 1

 85,163

 

 

 

 

 

 

 

 

Depreciation and amortisation

Interest income

Interest expense

Net (losses)/gains from foreign currencies and currency derivatives

Net non-recurring expense

Profit before income tax expense

 9,525

 (1,726)

 16,008

 1,722

 (50)

  - 

 25,479

Income tax expense

Profit for the period

 9,525

 (1,726)

 15,939

 1,434

 (50)

  - 

 25,122

                 

 

4.         Segment Information (continued)

Statement of comprehensive income as at 30 June 2018 by segments are presented below:

 

 

 

Period ended 30 June 2018 Unaudited

Referral Hospitals

Clinics

Pharmacy and Distribution

Medical Insurance

Diagonstics

Intersegment transactions and consolidation

Total

Healthcare services revenue

Revenue from pharma

Net insurance premiums earned

Revenue

 130,618

 

 

 

 

 

 

 

 

Cost of healthcare services

Cost of sales of pharmaceuticals

Cost of insurance services and agents' commissions

Costs of services

 (75,358)

 (10,944)

 (191,412)

 (23,792)

 (1,077)

 13,736

 (288,847)

Gross profit

 55,260

 8,135

 62,779

 3,213

 301

 (835)

 128,853

 

 

 

 

 

 

 

 

Other operating income

 

 

 

 

 

 

 

 

Salaries and other employee benefits

General and administrative expenses

Impairment of healthcare services, insurance premiums and other receivables

Other operating expenses

 

 (28,518)

 (5,806)

 (39,492)

 (2,820)

 (226)

 3,694

 (73,168)

 

 

 

 

 

 

 

 

EBITDA

 34,530

 2,751

 24,561

 716

 75

 (2)

 62,631

 

 

 

 

 

 

 

 

Depreciation and amortisation

Interest income

Interest expense

Net (losses)/gains from foreign currencies and currency derivatives

Net non-recurring expense

Profit before income tax expense

 10,545

 (1,548)

 19,266

 288

 (42)

 (2)

 28,507

Income tax expense

Profit for the period

 10,471

 (1,548)

 19,266

 245

 (42)

 (2)

 28,390

                 

 

5.     Cash and Cash Equivalents

 

Unaudited

30 June 2019

 

31 December 2018

Current and on-demand accounts with banks

12,786

 

33,823

Cash on hand

2,724

 

2,331

Total cash and cash equivalents

15,510

 

36,154

Cash and cash equivalents of