Georgia Healthcare Group PLC Annual Report 2018 Strategic Report Business review – overview of financial results Discussion of the Group results Income statement, GHG consolidated GEL thousands; unless otherwise noted FY18 FY17 Change, Y-o-Y Revenue, gross 849,917 747,750 13.7% Corrections and rebates (3,611) (2,039) 77.1% Revenue, net 846,306 745,711 13.5% Revenue from healthcare services 301,987 263,357 14.7% Revenue from pharmacy and distribution 518,578 450,315 15.2% Net insurance premiums earned 55,112 53,710 2.6% Eliminations (29,371) (21,671) 35.5% Costs of services (577,705) (517,712) 11.6% Cost of healthcare services (174,073) (150,572) 15.6% Cost of pharmacy and distribution (386,372) (340,210) 13.6% Cost of insurance services (45,427) (48,583) -6.5% Eliminations 28,167 21,653 30.1% Gross profit 268,601 227,999 17.8% Salaries and other employee benefits (84,509) (75,430) 12.0% General and administrative expenses (54,436) (48,618) 12.0% Impairment of receivables (4,448) (4,175) 6.5% Other operating income 7,066 8,372 -15.6% EBITDA 132,274 108,148 22.3% Depreciation and amortisation (33,883) (25,704) 31.8% Net interest expense (39,470) (30,941) 27.6% Net gains/(losses) from foreign currencies (2,879) (397) NMF Net non-recurring income/(expense) (2,187) (4,780) -54.2% Profit before income tax expense 53,855 46,326 16.3% Income tax benefit/(expense) (616) (386) 59.6% Profit for the period 53,239 45,940 15.9% Attributable to: – shareholders of the Company 34,434 29,050 18.5% – non-controlling interests 18,805 16,890 11.3% Gross revenue business with a 39% share, while posting strong EBITDA margin – In 2018, the Group y-o-y double-digit revenue growth was driven 10.1%. Our medical insurance business contributed 4% to the Group’s by pharmacy and distribution and healthcare services businesses. full year EBITDA, compared to negative contribution in prior year. In 2018, 59% of our revenues came from the pharmacy and distribution business, 34% from the healthcare services business and Depreciation and amortisation the remaining 7% from the medical insurance business. By payor mix, This year’s increased depreciation and amortisation expense now 54% of the Group’s total revenue was from out-of-pocket payments,1 fully reflects the Group’s recent investment in sizeable development 24% from UHC payments and 22% from other sources. projects in our healthcare business, launching new healthcare facilities and a number of new services. Gross profit We delivered increasing gross profit in 2018. The Group’s gross Net interest expense. The y-o-y increase in net interest expense margin improved to 31.6% in FY18 (30.5% in FY17). The pharmacy was in line with the increased balance of borrowed funds, mainly to and distribution business was major contributor to this growth, partly finance planned capital expenditure. Starting from 2019 we expect the as a result of successful ongoing negotiations with manufacturers Group’s leverage to decrease gradually in line with the debt principal for price discounts. The next biggest contributor to the Group’s repayment schedule, reducing interest expense. margin enhancement was our medical insurance business, which considerably reduced its loss ratio during 2018, as a result of Loss from foreign currencies. The loss from foreign currencies is improvement measures implemented since 2Q17. In 2018, our attributable to the pharmacy and distribution business. About 70% newly-launched healthcare facilities and services remained in their of inventory purchases in the pharmacy and distribution business initial roll-out phase, affecting healthcare services business margins, are denominated in foreign currency: c.40% in Euro and c.30% which were slightly subdued. Excluding the impact of hospitals’ in US dollars. roll-outs, the existing business’ gross margin improved by 30 bps in 2018 – mainly as a result of focused efficiency measures. Profit The pharmacy and distribution business was the main driver of EBITDA the 2018 GHG profit (up 15.9% y-o-y), contributing GEL 34.2 million, EBITDA was up y-o-y 22.3% in 2018. The healthcare services followed by the healthcare services contributing GEL 16.1 million. business was the main contributor to the Group’s 2018 EBITDA, The medical insurance businesses also contributed positively into contributing 57% in total, with a 24.9% EBITDA margin. the Group full year profit – GEL 2.9 million, compared to negative The next largest contributor was the pharmacy and distribution contribution of GEL 2.6 million in 2017. 1 Includes: healthcare services out-of-pocket revenue, pharmacy and distribution and medical insurance businesses’ revenue from retail. 60