Strategic Report 01 Performance 02 03 04 All payment sources contributed to our revenue growth. The increase in operating expenses on a y-o-y basis is primarily Notwithstanding that Government-funded healthcare programmes driven by the expansion of the business as well as the new openings. remained the main contributor to our healthcare services revenues, The decrease in other operating income reflects the accounting we continue to make strong progress towards our goal to diversify impact of the call option (exercisable in 2023) on the remaining 33% our earnings. The share of Government financing in the healthcare non-controlling minority interest in Pharmadepot (theparacy and services business revenue decreased by 80 bps in 2018 (from 67.4% distribution brand acquired in 2017). in 2017 to 66.6% in 2018), while the share of out-of-pocket payment increased by 140 bps (from 24.6% in 2017 to 26.0% in 2018). The healthy increases in full year EBITDA reflects the EBITDA contributions of our two new flagship hospitals and polyclinics, This is driven by growth in the number of elective services we provide increased demand for current services at our existing facilities and in our hospitals, by the launch of the Regional Hospital (the main focus efficiency initiatives implemented. EBITDA margins, however, were of which is on providing a higher level of elective care services) as down somewhat mainly due to three factors: (1) the roll-out phase of well as by the enhanced footprint of our polyclinics, which are partially the newly-opened facilities; (2) the Government’s UHC changes which or fully funded out-of-pocket. The further ramp-up of the Regional reduced our revenue from May 2017 and that have full effect in 2018; Hospital and the continued expansion of our polyclinics business are and (3) the accounting effect of the call option mentioned above. expected to further support increasing trend of out-of-pocket revenue share in the overall mix. The EBITDA margin for referral hospitals and community clinics was 25.7% in 2018 (27.2% in 2017). Excluding the dilutive effect of roll-outs, Gross profit, healthcare services business the EBITDA margin was towards our targeted level in 2018 – at 28.7%. (GEL thousands, unless otherwise noted) FY18 FY17 Change, Y-o-Y The polyclinics’ EBITDA margin stood at 13.0% for 2018, compared Cost of healthcare services (174,073) (150,572) 15.6% to 13.2% in 2017. After the roll-out phase is completed, we expect Cost of salaries and other the run rate EBITDA margin for our polyclinics to increase. employee benefits (109,478) (95,655) 14.5% Cost of materials and With the gradual ramp-up of the newly-opened healthcare facilities supplies (47,504) (40,887) 16.2% we expect the healthcare services EBITDA margin to improve over Cost of medical service the next few quarters. providers (3,347) (1,920) 74.3% Cost of utilities and other (13,744) (12,110) 13.5% Profit for the period, healthcare services business Gross profit 127,914 112,785 13.4% (GEL thousands, unless otherwise noted) FY18 FY17 Change, Y-o-Y Gross margin 41.9% 42.5% Depreciation and amortisation (30,772) (22,699) 35.6% Net interest income (expense) (27,567) (18,210) 51.4% Cost of healthcare services as Net gains/(losses) from % of revenue foreign currencies (171) 1,634 NMF Direct salary rate 35.8% 36.0% Net non-recurring income/ Materials rate 15.5% 15.4% (expense) (1,328) (3,425) -61.2% Profit before income tax The recent launches of hospitals naturally increased our cost base, expense 16,170 27,371 -40.9% mainly cost of materials and cost of utilities. The materials rate Income tax benefit/(expense) (37) (11) 236.4% excluding the effect of newly-launched hospitals remained well- Profit for the period 16,133 27,360 -41.0% controlled and stood at 15.1% in 2018. Despite the fact that some healthcare facilities are in their early roll-out phase, as a result of Since the launch of the Regional Hospital (March 2018), the accounting focused efficiency initiatives, we managed to slightly decrease the impact of the Group’s investments in new hospitals on depreciation direct salary rate in 2018. Engaging in state oncology programme and amortisation expense is now fully reflected in our results. increased the cost of service providers in the regions, where we Going forward we expect only modest increases in depreciation have no presence. and amortisation reflecting the completion of our Mega Lab (launched in December 2018) and smaller investments in new equipment mainly We expect the direct salary rate and materials rate to improve further in connection with the roll-out of new services. as we complete the ramp-up phase of the newly-launched hospitals and services and continue our focus to drive efficiencies across our The increase in net interest expense reflects the increase in our total healthcare facilities and improve our margins. borrowing balance to finance planned capital expenditure. Interest expense is expected to decline over the next few years, as we reduce EBITDA, healthcare services business our debt balance. (GEL thousands, unless otherwise noted) FY18 FY17 Change, Y-o-Y (51,906) (42,714) Operating highlights: Operating expenses 21.5% Our adjusted referral hospital bed occupancy rate was at 63.3%1 • Salaries and other in 2018 (64.5% in 2017). employee benefits (35,178) (30,998) 13.5% The average length of stay at referral hospitals was 5.4 days2 • General and in 2018 (5.5 days in 2017). administrative expenses (18,079) (16,392) 10.3% Excluding newly-launched hospitals, the average revenue per • Impairment of receivables (4,632) (4,107) 12.8% referral hospital bed was KGEL 107.9 (KUS$ 40.3) in 2018, Other operating income 5,983 8,783 -31.9% compared to KGEL 103.2 (KUS$ 39.8) in 2017. EBITDA 76,008 70,071 8.5% EBITDA margin 24.9% 26.4% 1 Adjusted to exclude the Tbilisi Referral Hospital and the Regional Hospital; the calculation also excludes emergency beds. 2 The calculation also excludes emergency beds. 63