Georgia Healthcare Group PLC Annual Report 2018 Strategic Report Business review – overview of financial results continued Discussion of pharmacy and distribution business Results Income Statement, pharmacy and distribution business GEL thousands; unless otherwise noted FY18 FY17 Change, Y-o-Y Pharma revenue 518,578 450,315 15.2% Costs of pharma (386,372) (340,210) 13.6% Gross profit 132,206 110,105 20.1% Salaries and other employee benefits (45,925) (40,679) 12.9% General and administrative expenses (35,169) (31,180) 12.8% Impairment of receivables – (44) NMF Other operating income 1,103 652 69.2% EBITDA 52,215 38,854 34.4% EBITDA margin 10.1% 8.6% Depreciation and amortisation (2,352) (2,110) 11.5% Net interest income (expense) (11,924) (11,936) -0.1% Net gains/(losses) from foreign currencies (2,923) (2,065) 41.5% Net non-recurring income/(expense) (859) (1,496) -42.6% Profit before income tax expense 34,157 21 ,247 60.8% Income tax benefit/(expense) – (65) NMF Profit for the period 34,157 21,182 61.3% Revenue and gross profit, pharmacy and distribution business EBITDA, pharmacy and distribution business We enjoyed strong, double-digit revenue growth in both our retail (GEL thousands, unless otherwise noted) FY18 FY17 Change, Y-o-Y and distribution businesses as shown in the table below. Operating expenses (79,991) (71,251) 12.3% Revenue by types at pharma Salaries and other employee benefits (45,925) (40,679) 12.9% (GEL thousands, unless otherwise noted) FY18 FY17 Change, Y-o-Y General and administrative Pharmacy and distribution expenses (35,169) (31,180) 12.8% revenue 518,578 450,315 15.2% Impairment of receivables (44) NMF – Revenue from retail 384,109 336,366 14.2% Other operating income 1,103 652 69.2% Revenue from distribution 134,469 113,949 18.0% EBITDA 52,215 38,854 34.4% Pharma business revenue from EBITDA margin 10.1% 8.6% Retail % of total revenue 74.1% 74.7% Gross profit margin 25.5% 24.5% The business posted y-o-y positive operating leverage of 7.8 ppts. Salaries and other employee benefits as well as general and administrative The increase in y-o-y revenues from retail is attributable to the expansion expenses favourably lagged behind revenue growth. Apart from business and organic sales growth of the business. In 2018 we have added expansion, the increase in general and administrative expenses is mainly 15 new pharmacies in our chain and by the end of the year number attributable to marketing activities to support revenue growth and slightly of pharmacies reached 270. We are heading towards a total of 300 increased rent expense due to the GEL devaluation in 2018. pharmacies over next few years. Due to active marketing campaigns, Our full year EBITDA margin substantially exceeded our 2018 promotions and other sales initiatives, the business posted strong y-o-y “more than 8%” medium-term target. same-store growth of 8.5% in 2018, as a result the number of bills issued in our pharmacies increased by 7.2% over the same period. Profit for the period, pharmacy and distribution business Average bill size also increased and reached GEL 13.4 in 2018. The share (GEL thousands, unless otherwise noted) Change, Y-o-Y FY18 FY17 of parapharmacy sales in retail revenue was 29.6%. Depreciation and amortisation (2,352) (2,110) 11.5% In 2018, the pharmacy and distribution business made a strong progress Net interest income (expense) (11,924) (11,936) -0.1% in growing wholesale revenue in hospitals and pharmacies by signing Net gains/(losses) from foreign new corporate accounts – a strategic priority. Acquiring new corporate currencies (2,923) (2,065) 41.5% accounts and actively engaging in state programmes have resulted in Net non-recurring income/ the double-digit growth of revenue from distribution. (expense) (859) (1,496) -42.6% Profit before income tax Gross profit margin in the pharmacy and distribution business improved expense 34,157 21,247 60.8% dramatically, up 100 bps y-o-y, as the business continued to extract Income tax benefit/(expense) (65) NMF – procurement synergies throughout the year. The increase was mainly Profit for the period 34,157 21,182 61.3% driven by the increased margin on non-medication categories (personal care, beauty and other parapharmacy products), total sales of which In 2018 interest expense included GEL 1.1 million from unwinding was GEL 118.3 million in 2018 with 30% gross profit margin, compared of discount of the Pharmadepot (the pharmacy and distribution to GEL 107.4 million in 2017 with 27% gross profit margin. brand acquired in 2017) remaining acquisition holdback, compared to GEL 1.8 million in 2017, which is a non-cash expense. Our gross profit margins also benefit from the increased sales of private label products. Currently, 37 private label medicines are presented in Operating highlights: our pharmacies, with revenue contribution of GEL 4.8 million in 2018, • Retail customer interactions per month was c.2.3 million in 2018 up 21.8% y-o-y. In the first half of 2019, private label personal care (c.2.1 million in 2017). products will also be introduced in our pharmacies under the brand • Average bill size was GEL 13.4 million in 2018 (GEL 13.3 million name “Attirance”. We will offer a wide range of personal care products in 2017). and significantly enhance our position as market leader in this segment. • C.0.7 million loyalty card members as at February 2019. 64