Strategic Report 01 Overview 02 03 04 We have expanded the number of pharmacies to 270 in major cities, the Group’s first dividend. In addition to providing greater access compared to 255 a year ago, and plan to further expand to over 300 to affordable high-quality healthcare, the Group is pursuing attractive pharmacies over the next couple of years. Our wholesale distribution new growth opportunities. It is building markets in areas such as business also delivered strong 2018 revenue growth of 18%. medical tourism, outpatient services, the provision of dental services, aesthetics, and laboratory diagnostics. When combined with the The pharmacy and distribution business EBITDA increased 34% y-o-y organic growth in our existing businesses, the higher utilisation of to GEL 52 million. The business full year EBITDA margin increased 150 the recently-launched new hospitals and polyclinic network, and the basis points, reaching 10.1% in 2018, substantially above our targeted expansion of our pharmacy and distribution business, we are targeting “more than 8%” margin. By seeking additional discounts from a double-digit compound annual growth rate in revenues over the manufacturers and constantly working to improve our product mix next few years. at our pharmacies, including an increased range of private labelled The Board and the management also expect the Group to deliver an medicines and para-pharmacy products, we expect to continue to improved return on invested capital in each business and to generate deliver strong EBITDA going forward. The synergies we have been substantially increased free cash flow. This reflects both higher able to extract by combinigour t o pharma chains have enabled earnings and reduced investment requirements over the next the business to provide Georgians affordable pricing on key products, few years, following the completion of our significant three-year while keeping our margin at an attractive level. investment programme. Our capital allocation framework considers The business achieved net profit totalling GEL 34 million for the year, the likely capital required over the next few years to finance our growth of over 60%, reflecting the combination of strong revenue growth and maintain our assets. Accordingly, management and growth and improved margins, together with focused cost management. the Board have decided the following: • To recommend to shareholders at the 2019 Annual General Medical insurance. Our medical insurance business had successful Meeting, a final dividend of GEL 0.053 per share, to be paid year in 2018, delivering all its strategic priorities and KPIs. The business in respect of the 2018 financial year. This represents a payout turned around its earnings profile and at the same time continued of 20% of 2018 earnings. to develop its role as an important feeder network in the origination To adopt a new dividend policy reflecting our intent that 20%-30% • and directing of patients towards our polyclinics and pharmacies of annual profit attributable to shareholders will be distributed in particular. The Group’s claims retention rates improved significantly, as dividends. reaching c.40% in 2018. The combined ratio improved to 94.0% To target managing the Group balance sheet, on an ongoing basis, • for 2018, compared to 102.5% last year. As a result, the business at an average less than 2.0 times net debt to EBITDA from the end delivered positive EBITDA of GEL 4 million in 2018, and a net profit of 2020. of GEL 3 million, compared to a similar net loss in 2017. The Georgian macroeconomic environment. The Georgian economy The business has also started 2019 successfully. By winning recent continues to perform well with GDP growth in 2018 estimated at 4.7%. tenders, the business retained one and added another of the country’s Strong external demand and double-digit growth of foreign exchange largest insurance clients for 2019. As a result, the total number inflows reduced the current account deficit in 2018 and, in 3Q18 for the of insured clients is now c.230,000. With the increased client base, first time in the country’s history, Georgia had a current account surplus GHG’s insurance business has become the largest private payer (0.3% of GDP). On the back of country’s strong economic growth, the in the healthcare sector, further ensuring profitable growth and Government’s healthcare budget continues to increase. According to significant synergies across the Group. its recently approved 2019 budget, total Government expenditure will Investing in people development. We continue various training increase by c.5%, with the health care (“UHC”) budget up c.7%. We programmes for our employees to help them contribute to better expect further macroeconomic growth to continue these trends and business performance through personal and professional development. support domestic economic growth, including the Georgian healthcare A key objective of the Group is to invest in the next generation of services market, over the next few years. doctors and position ourselves as the employer of choice. In 2018 Apart from market growth over the next few years, we expect to we spent a total of GEL 3 million on talent development. Our “GHG benefit from our recent investments, and that increased utilisation Leadership Programme” continuous to be one of the most popular of our new and existing hospitals will translate into further growth, leadership courses among our employees and currently over 50 improved margins and higher cash generation. The Group will continue middle level managers are engaged in the programme to improve their to focus on its key priorities such as developing medical tourism and leadership and managerial skills. Over 200 talented people are currently laboratory diagnostic services, expanding the outpatient network and involved in our medical residency programme, which improves the dental clinics, adding new pharmacies, upgrading product mix and quality of postgraduate preparation and facilitates an increase in the developing new opportunities. The Group’s strong balance sheet number of qualified doctors in the country. Successful participants and increasing operating cash flows (an increase over 70% in 2018), from the programme have already started employment as junior together with improved earnings and lower investment capital doctors within our healthcare facilities. We are pleased that this expenditure requirements, will enable us to gradually reduce the year we will also have the first 44 graduates from the programme. business leverage and further improve our returns on invested capital. Consistently improving clinical standards. We remain focused on developing quality management measures and harmonising them acrossNikoloz Gamkrelidze, our integrated network through consistent protocols, procedures and Chief Executive Officer our recently implemented clinical key performance indicator monitoring 2 April 2019 system. In 2018 our Clinical Team, headed by the Group’s Chief Clinical Officer, was actively engaged in developing and implementing these quality management measures, based on best practice principles, in our This Strategic Report, set out on pages 2 to 65 was approved recently launched flagship hospitals, Regional Hospital and Tbilisi Referral by the Board of Directors on 2 April 2019 and signed on its Hospital. In 2018, several additional projects were initiated, addressing behalf by Nikoloz Gamkrelidze, Chief Executive Officer. clinical quality issues including clinical pathway improvement projects related to sepsis, pneumonia and rational antibiotic therapy, standards Nikoloz Gamkrelidze, of personnel safety and occupational safety. Chief Executive Officer 2 April 2019 Capital framework and Dividend Policy. I’m pleased that we have completed our capital framework review and have recently announced 9