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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Georgia Healthcare Group Plc | LSE:GHG | London | Ordinary Share | GB00BYSS4K11 | ORD GBP0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 70.80 | 70.00 | 71.60 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMGHG
RNS Number : 9749N
Georgia Healthcare Group PLC
15 August 2017
Georgia Healthcare Group PLC
2(nd) quarter and half-year 2017
Results
http://www.rns-pdf.londonstockexchange.com/rns/9749N_-2017-8-14.pdf
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 Tuesday, 15 August 2017, at 14:00 UK / 15:00 CET / 09:00 U.S Eastern Time. Please find dial ins:
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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; clinical and medical risk; concentration of revenue and the Universal Healthcare Programme; exchange rate fluctuations, including depreciation of the Georgian Lari; information technology and operational risk; macroeconomic 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 2016 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 2017 consolidated financial results. Unless otherwise mentioned, comparatives are for the second quarter of 2017. The results are based on International Financial Reporting Standards ("IFRS") as adopted in the European Union ("EU"), are unaudited and extracted from management accounts.
PERFORMANCE HIGHLIGHTS
GHG announces today the Group's 2Q17 and 1H17 consolidated results, reporting a half year profit of GEL 24.2 million (US$10.1 million/GBP 7.8 million) and earnings per share ("EPS") of GEL 0.12 (US$0.05 per share/GBP 0.04 per share).
GEL million; unless Change, Change, Change,
otherwise noted 2Q17 Y-o-Y Q-o-Q 1H17 Y-o-Y
GHG - the leading integrated player in the Georgian
healthcare ecosystem
Revenue 184.6 81.6% -1.0% 371.0 112.9%
EBITDA 26.1 54.6% 4.1% 51.2 50.4%
Profit before tax 11.3 79.8% -13.5% 24.3 44.9%
EPS, GEL 0.05 -2.7%(1) -2.1% 0.12 -3.6%(1)
ROAE normalised(2) 9.7% -3.2%(3) -1.5% 11.4% -2.8%(3)
Healthcare services business
Revenue 66.6 13.3% 0.4% 132.9 11.5%
Gross profit 28.3 6.1% 1.2% 56.2 4.7%
EBITDA 18.3 6.6% 8.8% 35.1 0.4%
-1.7 2.1 -2.9
EBITDA margin (%) 27.5% ppts ppts 26.4% ppts
Profit before tax 7.9 -8.8% 10.7% 15.1 -21.9%
Pharma business(4)
Revenue 110.9 261.5% -0.4% 222.3 624.5%
Revenue from retail
sales 82.5 257.5% -3.2% 167.7 627.1%
Gross profit 26.1 363.8% -3.2% 53.1 NMF
Gross profit margin -0.7
(%) 23.5% 5.2 ppts ppts 23.9% 5.5 ppts
EBITDA 8.9 NMF 2.7% 17.6 NMF
0.2
EBITDA margin (%) 8.0% 6.2 ppts ppts 7.9% 6.1 ppts
Profit before tax 4.5 NMF -35.0% 11.5 NMF
Medical insurance business
Net insurance premiums
earned 13.4 -12.3% -4.0% 27.4 -6.0%
4.4
Loss ratio (%) 89.0% 4.0 ppts ppts 86.8% 1.1 ppts
-3.1 -1.6 -1.6
Expense ratio (%) 18.6% ppts ppts 19.4% ppts
2.9 -0.5
Combined ratio (%) 107.6% 0.9 ppts ppts 106.2% ppts
EBITDA (0.8) -6.1% 75.9% (1.2) -20.0%
Loss before tax (1.2) -41.9% 8.4% (2.3) 4.0%
(1) Comparison on a normalised basis -- 2Q16 and 1H16 Earnings per share (EPS) is calculated as adjusted net profit - 2Q16 and 1H16 net profit was normalised and adjusted for one-off non-recurring gain due to deferred tax adjustments (in the amount of GEL 29.3 million for GHG, which fully resulted from the Group's healthcare services business) and adjusted for one-off currency translation loss in June ("translation loss") (in the amount of GEL 2.1 million), which resulted from settlement of the US Dollar denominated payable for the acquisition of GPC, the Group's pharma business - divided by weighted average number of shares outstanding during the same period.
(2) Normalised ROAE is calculated as net profit for the period attributable to shareholders, net of non-recurring items, divided by average equity attributable to shareholders for the same period net of unutilised portion of IPO proceeds.
(3) Comparison on a normalised basis - 2Q16 and 1H16 Return on equity (ROAE) is calculated on adjusted net profit (explained in footnote 1)
(4) We entered into the pharma business and started consolidating GPC's results from May 2016 and Pharmadepot's results from January 2017. Thus 2Q16 and 1H16 pharma business results only includes GPC's figures for May-June period only
CHIEF EXECUTIVE OFFICER STATEMENT
Both Georgia Healthcare Group and the wider Georgia Healthcare system are in a strong period of growth and evolution. Georgia Healthcare Group, in particular, is in a significant business roll-out phase in a number of key areas and, in the first half of 2017, has continued to make strong progress in integrating recent acquisitions and delivering key organic growth priorities such as the Sunstone and Deka hospital redevelopment projects. All this has been achieved whilst continuing to adapt to changes in Georgia's Universal Healthcare Programme ("UHC") and seeking to develop a more diverse stream of revenues, particularly in the pharma and Polyclinic businesses. For the first half of 2017, EBITDA of GEL 51.2 million represented a 50.4% increase half-on-half. In the second quarter of 2017, Group EBITDA totalled GEL 26.1 million, an increase of 54.6% year-on-year and 4.1% quarter-on-quarter.
Over the next few years in our healthcare services business, we aim to achieve one-third market share by hospital beds, invest to close existing medical service gaps, and deliver a rapid launch of Polyclinics in the highly fragmented and underpenetrated outpatient market. In pharma, our newest business area, we aim to achieve more than 30% market share by revenue whilst improving the EBITDA margin to more than 8%.
In the healthcare services business, our referral hospitals continued to deliver double-digit organic revenue growth during the first half of the year, at the same time as continuing to invest significantly in our two Tbilisi hospital redevelopment projects - Sunstone and Deka - and a number of modernisation programmes. The first phase of Sunstone opened in April 2017, two months ahead of schedule, and the 220 newly renovated beds are already enabling a population of over one million in east Tbilisi and in East Georgia to get access to significantly improved healthcare services closer to their home. Following the April opening of Sunstone, it was pleasing to see strong levels of bed occupancy in the first two months build to 26.4% in June 2017. The first phase of Deka, the diagnostics centre, was opened in the second half of 2016, and we expect to complete the full launch of Deka as a 320 bed multi-profile flagship hospital by the end of 2017. The impact of these redevelopment projects reduced the healthcare services EBITDA margin to 25.3% in the first quarter of 2017, but this has already started to recover towards our targeted 30%. In the second quarter of 2017 the EBITDA margin increased by 220 basis points to 27.5%.
The Government's UHC continues to be the main contributor to the Group's healthcare services revenues, although we are actively seeking to further diversify our sources of revenues and to reduce reliance on Government funded programmes. There have been a number of recent changes to the UHC which are leading to a slight switch towards payment for services for lower income patients, compared with hospital services for higher-earning patients, as well as a move to increase the level of co-payment for elective services for patients in the middle-income category. In addition, the Government has also recently introduced a revised reimbursement mechanism for the provision of intensive care services, which is likely to reduce reimbursement for these facilities.
In July 2017, we acquired two community hospitals in the Khashurui and Qareli regions, which will add an additional 90 beds to our portfolio. These acquisitions support our plans to expand our presence throughout Georgia, particularly in the country's under-represented regions, and expand the catchment areas of our key referral hospitals.
In addition, we are continuing our programme of launching new medical services in our referral hospitals and in 2017 plan to launch over 60 new services across 14 different hospitals. During the first half of 2017, we completed the launch of 21 new services, as part of our desire to close medical service gaps in the country.
We continue to make progress in the development of a nationwide chain of Polyclinics to provide quality outpatient services to a much larger part of Georgia's population and, at the end of the half year, had 13 district Polyclinics and 24 express Polyclinics in operation. Revenues from Polyclinics increased by 43.8% in the first half of 2017, compared to the first half of 2016. We are also currently experiencing a rapid increase in customer footfall into our Polyclinic network, with average footfall increasing by nearly 40% over the last two months. The Polyclinic EBITDA margin was 15.2% in the first half of 2017, reflecting the impact of the rapid roll-out, and we expect this margin to increase to more than 30% after the roll-out phase is completed towards the end of 2018.
In the pharma business, the Group has now largely completed the integration of the Pharmadepot and GPC chains of pharmacies. We now have 247 pharmacies in a country-wide distribution network, which also includes 21 pharmacies located in our hospitals and clinics.
Our key focus during the first half of 2017 was to ensure the full integration of the two pharmacies with as little business disruption as possible. This has been successfully achieved and has included the integration of the both pharmacies' customer software during the second quarter. There was some minor disruption in 2Q but we have now completed the integration and the combined customer software is fully operational. The process of eliminating unnecessary costs is ongoing and we remain on track to deliver all initially expected cost savings and revenue enhancements. As a result of this progress, the pharma business achieved a second quarter EBITDA margin of 8.0%, close to our medium-term target of more than 8%.
Going forward, the strong performance of the combined pharma business will be an important growth opportunity for the Group and allow us to further diversify our earnings profile.
Our medical insurance business had started to make progress towards stabilising its earnings, following the expiration of its loss-making contract with the Ministry of Defence in January 2017. Recent changes in the Government's UHC programme, that redefined UHC coverage eligibility criteria for certain citizens based on their income level, has however led to an increase in the cost of insuring those individuals that are no longer covered by UHC. As a result of these increased claims, a number of insurance contracts became uneconomic and the medical insurance business continued to generate negative EBITDA in the first half of 2017. Consequently, the business has been through a process of either renegotiating specific contracts or terminating contracts that were likely to remain loss-making, resulting in EBITDA breaking even in July 2017. Notwithstanding these adjustments following the changes in UHC coverage, we continue to expect the medical insurance business to reach its 2018 targets of a loss ratio less than 80%, and a c.14% expense ratio (excluding commissions).
More importantly, our insurance business provides a strong feeder role in originating and directing patients to our healthcare facilities, mainly to Polyclinics and pharmacies, and we continue to improve the ratio of medical insurance claims retained within the Group. In the second quarter of 2017, 38.1% of medical expense claims were retained within the Group, compared to 35.6% in the first quarter of the year.
The structure of the UHC continues to evolve and the healthcare services business is continuing to adapt to reflect these changes, whilst continuing to prioritise efforts to broaden the source of revenues throughout the business, through elective care services which are largely funded out-of-pocket, and reduce reliance on the UHC. In the short-term however recent changes to the UHC are likely to reduce Group revenues during the year by c.GEL5-6 million. Georgia Healthcare Group however is the clear market leader in this fast-evolving healthcare system, and remains firmly on track to deliver on its key priorities, in particular to more than double 2015 healthcare services revenues by 2018, whilst achieving a more than 30% EBITDA margin. The Group has two significant major hospital redevelopments being completed during 2017, and both Sunstone and Deka will provide substantial earnings impetus over the next few years. In addition, the successful integration of the Group's pharma businesses has created a combined business with a 29% market share and significant opportunities to improve cross-selling, particularly to Polyclinics, to develop customer loyalty and achieve further margin improvement. We remain well positioned to deliver further progress in the second half of 2017 and beyond.
Nikoloz Gamkrelidze, CEO of Georgia Healthcare Group PLC
DISCUSSION OF GROUP RESULTS
Georgia Healthcare Group PLC is the UK incorporated holding company of the largest integrated player in the fast-growing predominantly privately-owned Georgia Healthcare ecosystem of GEL 3.4 billion aggregated value. GHG is comprised of three main business lines: healthcare services business (consisting of hospital business and ambulatory business "Polyclinics"), pharma business and medical insurance business.
GHG is the single largest market participant in healthcare services industry in Georgia, accounting for 24.6% of total hospital bed capacity of the country, as of 30 June 2017. Our healthcare services business offers the most comprehensive range of inpatient and outpatient services targeting the mass market segment, through its vertically integrated network of hospitals and Polyclinics (outpatient clinics). In 2Q17 we operated with 35 hospitals with a total of 2,731 beds, including 15 referral hospitals with a total of 2,266 beds, which provide secondary or tertiary level healthcare services and 20 community hospitals with a total of 465 beds, which provide basic outpatient and inpatient healthcare services. We operated with ten Polyclinic clusters consisting of 13 district Polyclinics and 24 express outpatient clinics, which provide outpatient diagnostic and treatment services. These clinics are located in Tbilisi and major regional cities.
GHG is the largest pharmaceuticals retailer and wholesaler in Georgia, with approximately 29% market share by revenue. We entered into the pharma business in 2016 and expanded in 2017, by purchasing the third and fourth largest pharmaceuticals retailers and wholesalers in Georgia in May 2016 and January 2017, respectively. GHG's two pharmacy chains have now been merged but, operate under the separate brand names Pharmadepot and GPC. Our combined pharma business has 247 pharmacies, of which 24 also have express outpatient clinics. The number of our pharmacies located at our hospitals is 21.
GHG is also the largest provider of medical insurance in Georgia with a 30.9% market share based on 1Q17 net insurance premiums. Our medical insurance business consists of private medical insurance operations in Georgia, providing medical insurance products to corporate and retail clients. We have a wide distribution network and offer a variety of medical insurance products primarily to the Georgian corporates and also to retail clients. We had approximately 135,000 persons insured as at 30 June 2017. The medical insurance business plays an important role in our business model, as it is a significant feeder for our pharma business and healthcare services business, particularly for the Polyclinics (outpatient clinics), and we believe that role will grow in the future as we roll-out our Polyclinic growth strategy.
Income statement, GHG consolidated
GEL thousands;
unless otherwise Change, Change, Change,
noted 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 1H17 1H16 Y-o-Y
Revenue, gross 184,601 101,673 81.6% 186,447 -1.0% 371,048 174,249 112.9%
Corrections &
rebates (660) (724) -8.8% (623) 5.9% (1,283) (1,134) 13.1%
Revenue, net 183,941 100,949 82.2% 185,824 -1.0% 369,765 173,115 113.6%
Revenue from
healthcare services 65,940 58,055 13.6% 65,725 0.3% 131,665 118,096 11.5%
Revenue from
pharma 110,942 30,691 NMF 111,399 -0.4% 222,341 30,691 NMF
Net insurance
premiums earned 13,410 15,298 -12.3% 13,965 -4.0% 27,375 29,128 -6.0%
Eliminations (6,351) (3,095) 105.2% (5,265) 20.6% (11,616) (4,800) 142.0%
Costs of services (130,247) (67,395) 93.3% (129,746) 0.4% (259,993) (111,546) 133.1%
Cost of healthcare
services (37,652) (31,399) 19.9% (37,777) -0.3% (75,429) (64,397) 17.1%
Cost of pharma (84,822) (25,059) NMF (84,408) 0.5% (169,230) (25,059) NMF
Cost of insurance
services (12,718) (13,989) -9.1% (12,734) -0.1% (25,452) (26,836) -5.2%
Eliminations 4,945 3,052 62.0% 5,173 -4.4% 10,118 4,746 113.2%
Gross profit 53,694 33,554 60.0% 56,078 -4.3% 109,772 61,569 78.3%
Salaries and
other employee
benefits (18,424) (9,229) 99.6% (17,728) 3.9% (36,152) (16,152) 123.8%
General and administrative
expenses (11,400) (6,705) 70.0% (13,352) -14.6% (24,752) (9,268) 167.1%
Impairment of
receivables (1,003) (1,236) -18.9% (1,121) -10.5% (2,124) (2,216) -4.2%
Other operating
income 3,229 497 549.7% 1,182 173.2% 4,411 78 NMF
EBITDA 26,096 16,882 54.6% 25,059 4.1% 51,155 34,011 50.4%
Depreciation
and amortisation (6,481) (4,581) 41.5% (5,872) 10.4% (12,353) (9,046) 36.6%
Net interest
expense (7,828) (3,469) 125.7% (7,119) 10.0% (14,947) (5,125) 191.6%
Net gains/(losses)
from foreign
currencies 986 (1,964) -150.2% 2,778 -64.5% 3,764 (2,224) NMF
Net non-recurring
income/(expense) (1,478) (586) 152.2% (1,792) -17.5% (3,270) (816) NMF
Profit before
income tax expense 11,295 6,282 79.8% 13,054 -13.5% 24,349 16,800 44.9%
Income tax benefit/(expense) (88) 26,920 -100.3% (19) NMF (107) 28,425 NMF
of which:
Deferred
tax adjustments - 27,113 - 29,311
Profit for the
period 11,207 33,202 -66.2% 13,035 -14.0% 24,242 45,225 -46.4%
Attributable
to:
- shareholders
of the Company 6,172 27,755 -77.8% 8,832 -30.1% 15,004 37,676 -60.2%
- non-controlling
interests 5,035 5,447 -7.6% 4,203 19.8% 9,238 7,549 22.4%
of which:
Deferred
tax adjustments - 4,705 - - 5,057
Revenue. We delivered quarterly revenue of GEL 184.6 million, up 81.6% y-o-y and down 1.0% q-o-q. The quarterly and half year y-o-y growth was mainly attributable to the pharma business consolidation since May 2016, followed by the growth in healthcare services business, up 13.3% and up 11.5% respectively. The decrease in net insurance premiums earned reflects the expiration of the loss-making contract with the Ministry of Defence in January 2017.
The Group has further diversified its revenue by payment sources as a result of a higher proportion of pharma business revenues, which are funded largely out-of-pocket. In the first half of 2017, 34% of the Group's revenue came from the healthcare services business, 59% came from the pharma business and the remaining 7% came from the medical insurance business. This translated into the Group's total revenue from out of pocket payments being c.55%(5) , from Government (UHC) c.23% and from other sources c.22%.
Gross Profit. The Group reported gross profit of GEL 53.7 million in 2Q17, up 60.0% y-o-y and down 4.3% q-o-q, and GEL 109.8 million in 1H17, up 78.3% y-o-y. The gross margin for our healthcare services business increased (up 40 bps q-o-q), which is a result of our efforts towards increasing the utilisation of our healthcare facilities through elective care services, and realising further cost synergies. The gross margin in the pharma business was slightly reduced q-o-q as a result of an increased cost of goods sold. As anticipated, the recent launches of two large hospitals in Tbilisi together with a number of new medical services have temporarily reduced our healthcare services business margins, as they are currently in their initial roll-out phase. From 2Q17 the gross margin for healthcare services started to improve gradually and we expect this trend to continue. The gross margin in the pharma business was temporarily reduced in April as a result of an increased cost of goods sold, caused by the impact of previously purchased inventory at a higher foreign currency exchange rate. In May and June, this impact unwound and the gross margin returned to its normal level.
EBITDA. We reported record EBITDA of GEL 26.1 million (up 54.6% y-o-y and up 4.1% q-o-q) and GEL 51.2 million (up 50.4% y-o-y) for 2Q17 and 1H17, respectively. The healthcare services business was the main contributor to the Group's 2Q17 EBITDA, contributing 69% in total. The pharma business achieved an 8.0% EBITDA margin and we are fully on track to deliver our goal of a more than 8% EBITDA margin in the pharma business. The healthcare services EBITDA margin started to improve gradually, up by 210 bps q-o-q (with positive operating leverage at 11.4 percentage points q-o-q) and we expect further margin increases going forward.
Profit. The Group's profit totaled GEL 11.2 million in 2Q17 (up 39.2% y-o-y on a normalised(6) basis and down 14.0% q-o-q) and GEL 24.2 million in 1H17 (up 33.7% y-o-y on a normalised basis(6) ). The healthcare services business was the main driver of the 2Q17 Group profit, contributing GEL 7.9 million, followed by the pharma business which contributed GEL 4.7 million. This profit was partially offset by the loss of GEL 1.5 million reported by the medical insurance business.
Depreciation and amortisation. The growth in the Group's depreciation and amortisation reflects two main factors: 1) continued sizeable development projects and our active investing phase in healthcare facilities throughout the first half of 2017; and 2) consolidation of the pharma business entities. The q-o-q increase is fully attributable to the launch of the Sunstone hospital, which added to the depreciation of the Group from April 2017.
Financing costs. The increase in interest expense on a y-o-y basis is due to three main factors: 1) Lower base in 2016. At the end of 2015 and the beginning of 2016, the Group prepaid local banks debt to utilise the available cash post-IPO, subsequently realising significant savings in interest expense throughout 2016. From the second half of 2016 and in the first quarter of 2017 the Group sourced longer-term and less expensive funding from both local commercial banks and Development Financial Institutions ("DFIs") and used the proceeds for the development of healthcare facilities; 2) The first tranche of consideration payable for the Pharmadepot acquisition, which was funded through GEL 33.0 million raised from a local commercial bank at the beginning of 2017; and 3) Recognised interest expense of GEL 0.9 million, due to the unwinding of a discount resulting from the remaining consideration payable (in the amount of US$13.0 million) to Pharmadepot's former selling shareholders as part of total purchase price, payment of which will be carried out over the next five years. Discounted present value accounting is an IFRS requirement and does not result in actual cash outflow.
(5) Includes: healthcare services out of pocket revenue and pharma and medical insurance businesses revenue from retail
(6) Normalised as explained in footnote 1 on page 4
Selected balance sheet items, GHG consolidated
GEL thousands; unless otherwise Change, Change, noted 30-Jun-17 30-Jun-16 Y-o-Y 31-Mar-17 Q-o-Q Total assets, of which: 1,065,527 814,089 30.9% 1,109,533 -4.0% Cash and bank deposits 37,052 26,395 40.4% 100,229 -63.0% Receivables from healthcare services 96,784 70,398 37.5% 90,142 7.4% Receivables from sale of pharmaceuticals 15,550 6,110 154.5% 15,499 0.3% Insurance premiums receivable 26,936 34,275 -21.4% 29,773 -9.5% Property and equipment 612,159 501,739 22.0% 608,429 0.6% Goodwill and other intangible assets 124,490 64,733 92.3% 118,781 4.8% Inventory 107,169 42,470 152.3% 96,750 10.8% Prepayments 25,350 49,074 -48.3% 35,799 -29.2% Other assets 20,037 18,895 6.0% 14,131 41.8% Total liabilities, of which: 530,879 306,861 73.0% 588,612 -9.8% Borrowed funds 280,483 141,257 98.6% 321,091 -12.6% Accounts payable 87,691 52,582 66.8% 94,125 -6.8% Insurance contract liabilities 26,429 32,941 -19.8% 28,013 -5.7% Other liabilities 136,276 80,081 70.2% 145,383 -6.3% Total shareholders' equity attributable to: 534,648 507,228 5.4% 520,921 2.6% Shareholders of the Company 471,491 455,824 3.4% 463,369 1.8% Non-controlling interest 63,157 51,404 22.9% 57,552 9.7%
The 30.9% y-o-y growth in total assets reflects the significant investments in hospital renovations, Polyclinic roll-outs and the consolidation of the two pharma business acquisitions.
-- The q-o-q reduction in cash and bank deposits is due to ongoing funding of development projects as well as repayment of GEL 34.6 million in high yielding local currency bonds that matured in 2Q17.
-- The significant increases in both inventory and goodwill stem from the consolidation of the acquired pharma businesses, which make up GEL 92.2 million and GEL 77.8 million of the respective totals in these assets as at the end of 2Q17.
-- Borrowed funds have increased y-o-y as a result of the drivers explained above. The reduction in borrowed funds in 2Q17 is due to the maturity of local currency bonds.
-- The y-o-y increase in accounts payable is also attributable to consolidating the pharma business. Out of the GEL 87.7 million accounts payable balance, GEL 58.0 million relates to the pharma business.
DISCUSSION OF SEGMENT RESULTS
The segment results discussion is presented for the healthcare services, pharma and medical insurance businesses.
Discussion of Healthcare Services Business Results
Income Statement, healthcare services business
GEL thousands; unless Change, Change, Change,
otherwise noted 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 1H17 1H16 Y-o-Y
Healthcare service
revenue, gross 66,600 58,779 13.3% 66,348 0.4% 132,948 119,230 11.5%
Corrections & rebates (660) (724) -8.8% (623) 5.9% (1,283) (1,134) 13.1%
Healthcare services
revenue, net 65,940 58,055 13.6% 65,725 0.3% 131,665 118,096 11.5%
Costs of healthcare
services (37,652) (31,399) 19.9% (37,777) -0.3% (75,429) (64,397) 17.1%
Gross profit 28,288 26,656 6.1% 27,948 1.2% 56,236 53,699 4.7%
Salaries and other
employee benefits (7,996) (5,254) 52.2% (7,179) 11.4% (15,175) (11,369) 33.5%
General and administrative
expenses (4,154) (3,517) 18.1% (4,082) 1.8% (8,236) (5,479) 50.3%
Impairment of receivables (1,033) (1,120) -7.8% (980) 5.4% (2,013) (1,978) 1.8%
Other operating
income 3,190 395 NMF 1,112 186.9% 4,302 115 NMF
EBITDA 18,295 17,160 6.6% 16,819 8.8% 35,114 34,988 0.4%
EBITDA margin 27.5% 29.2% 25.3% 26.4% 29.3%
Depreciation and
amortisation (5,774) (4,121) 40.1% (4,939) 16.9% (10,713) (8,382) 27.8%
Net interest income
(expense) (4,435) (2,999) 47.9% (4,116) 7.8% (8,551) (5,258) 62.6%
Net gains/(losses)
from foreign currencies 1,118 (1,711) NMF 695 60.9% 1,813 (2,122) NMF
Net non-recurring
income/(expense) (1,255) 387 NMF (1,276) -1.6% (2,531) 157 NMF
Profit before income
tax expense 7,949 8,716 -8.8% 7,183 10.7% 15,132 19,383 -21.9%
Income tax benefit/(expense) - 26,619 NMF (11) -100.0% (11) 28,105 NMF
of which: Deferred
tax adjustments - 27,113 - - 29,311
Profit for the period 7,949 35,335 -77.5% 7,172 10.8% 15,121 47,488 -68.2%
Attributable to:
- shareholders
of the Company 5,636 29,888 -81.1% 5,764 -2.2% 11,400 39,939 -71.5%
- non-controlling
interests 2,313 5,447 -57.5% 1,408 64.3% 3,721 7,549 -50.7%
of which: Deferred
tax adjustments - 4,705 - - 5,057
Healthcare services business revenue(7)
Our healthcare services business recorded quarterly revenue of GEL 66.6 million (up 13.3% y-o-y and up 0.4% q-o-q) and 1H17 revenue of GEL 132.9 million (up 11.5% y-o-y). The healthcare services business revenue growth was fully organic.
Revenue by types of healthcare facilities
(GEL thousands,
unless otherwise Change, Change, Change,
noted) 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 1H17 1H16 Y-o-Y
Healthcare services
revenue, net 65,940 58,055 13.6% 65,725 0.3% 131,665 118,096 11.5%
Referral hospitals 57,358 49,667 15.5% 56,446 1.6% 113,804 101,693 11.9%
Community hospitals 4,876 5,389 -9.5% 5,661 -13.9% 10,537 11,309 -6.8%
Polyclinics (outpatient
clinics) 3,706 2,999 23.6% 3,618 2.4% 7,324 5,094 43.8%
(7) In prior quarter financial statements, the Group included revenue from sale of blood in healthcare services revenue. The Group reconsidered the presentation and decided that revenues from sale of blood should be included in other operating income rather than revenues (1H17 - GEL 428,000). The presentation of previous quarter comparative figures has been adjusted accordingly to conform to the presentation of the current quarter amounts.
The y-o-y increase in revenue from referral hospitals was driven by strong demand for current services at our existing facilities, as well as the renovation of our facilities and the launch of new medical services. Our renovation projects and our new services are described below under "Operating performance highlights and notable developments in 2Q17".
In 1H17, referral hospitals contributed 86% to total revenue from our healthcare services. We expect a significant portion of the future growth of our healthcare services revenue to come from referral hospitals, in line with our strategy to improve the quality of care throughout the country by further investing in facilities and developing new, high-quality elective care services in Georgia, to cover existing service gaps.
Effective from May 2017, the Government introduced a revised reimbursement mechanism relating to the provision of intensive care, reducing the Universal Healthcare Programme ("UHC") reimbursement of these services. We estimate that the revised level of reimbursement could reduce revenues by approximately GEL 3-4 million in 2017, which will partially offset some of the growth we had planned for this year, especially for our referral hospitals.
In 1H17 community hospitals contributed 8% to total revenue from healthcare services. Community hospitals play a feeder role for the referral hospitals, so we expect their revenue growth to be slower compared to the growth of referral hospital revenue. The decrease in community hospitals revenue y-o-y and q-o-q is attributable to another of the Government's new initiatives, also effective from May 2017, which introduced income level criteria for UHC coverage eligibility. The new initiative established co-payments on certain urgent and outpatient services for mid-level citizens, causing revenue from community hospitals to decrease. For more details regarding the new initiative please see "Operating performance highlights and notable developments in 2Q17" below.
In 1H17, Polyclinics (outpatient clinics) contribution to total revenue from healthcare services was 6% compared to 4% in 1H16. Currently we operate with 10 Polyclinic clusters consisting of 13 district Polyclinics and 24 express outpatient clinics. Express outpatient clinics are mostly integrated into our pharmacies and play a facilitating role for our pharma and district Policlinic patients. We expect growth in revenue from Polyclinics to accelerate over the next few years, in line with our strategy to increase the number of Polyclinic clusters from today's level, to more than 15 by the end of 2018.
As described under "Operating performance highlights and notable developments" below, we are engaged in an initiative to rebrand our ambulatory clinics and outpatient centers as "Polyclinics" due to better patient perception, as well as a related patient acquisition initiative. Through these activities, the average number of patients visiting our Polyclinics has increased by 39% over the last two months. In total, we plan c.200,000 patient acquisitions within a year, through organic growth and, possibly, strategic acquisitions of existing clinics.
Revenue by sources of payment
(GEL thousands,
unless otherwise Change, Change, Change,
noted) 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 1H17 1H16 Y-o-Y
Healthcare services
revenue, net 65,940 58,055 13.6% 65,725 0.3% 131,665 118,096 11.5%
Government-funded
healthcare programmes 43,527 41,835 4.0% 45,831 -5.0% 89,358 87,212 2.5%
Out-of-pocket payments
by patients 16,308 12,179 33.9% 15,048 8.4% 31,356 23,605 32.8%
Private medical
insurance companies,
of which 6,105 4,041 51.1% 4,846 26.0% 10,951 7,279 50.5%
GHG medical insurance 2,710 3,052 -11.2% 2,693 0.6% 5,403 4,746 13.8%
Share of Government
financing in revenue 66.0% 72.1% 69.7% 67.9% 73.8%
from healthcare
services
In our healthcare services business, we made strong progress towards our strategic goal to further diversify our revenue stream. UHC continues to be the main contributor to our healthcare services revenues. In 1H17, however, the share of the Government financing in the healthcare services business revenue decreased by 5.9 percentage points to 67.9% in 1H17, while this share in 2Q17 was 66.0% also down from both 2Q16 and 1Q17. The Government's new initiatives will further contribute to this goal.
The slight decrease in Government-funded healthcare programmes on a q-o-q basis is due to the two new Government initiatives mentioned above.
The goal to diversify our earnings will also be furthered by growing out-of-pocket and private medical insurance revenues.
Further growth in out-of-pocket payments is expected to be driven by two main factors: 1) growth in a number of elective services provided which are partially or fully funded out-of-pocket. With the increasing number of elective services, financed less by the state, the revenue from out-of-pocket payments by patients increases; 2) enhanced footprint of our Polyclinics (outpatient clinics), the revenue from which is primarily out-of-pocket, as the government provides minimal coverage for outpatient services.
The y-o-y and q-o-q growth of revenue from private medical insurance companies also continues to be supported by the roll-out of Polyclinics (outpatient clinics) as well as an enhanced relationship with other insurance companies who redirect their customers to our hospitals. Our Polyclinics stand out from competition as they are brand new, modern and provide a diverse range of services in one location, unlike the majority of our competitors, and are therefore an attractive proposition for insured customers. Our own medical insurance clients have increasingly utilised our Polyclinics, resulting in growth in revenue from GHG medical insurance generated by our healthcare services business up 13.8% in 1H17, compared to 1H16. Consequently, we are retaining significantly more outpatient claims from our medical insurance business within the Group. Retention stood at 39.3% in 1H17, up from 22.8% in 1H16. The revenue decrease 2Q17 over 2Q16 from the medical insurance business reflects the expiration of the loss-making contract with the Ministry of Defence.
Gross profit, healthcare services business
(GEL thousands,
unless otherwise Change, Change, Change,
noted) 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 1H17 1H16 Y-o-Y
Cost of healthcare
services (37,652) (31,399) 19.9% (37,777) * 0.3% (75,429) (64,397) 17.1%
Cost of
salaries
and other
employee
benefits (24,343) (19,857) 22.6% (23,095) 5.4% (47,438) (39,609) 19.8%
Cost of
materials
and
supplies (10,240) (9,228) 11.0% (10,467) * 2.2% (20,707) (18,841) 9.9%
Cost of
medical
service
providers (434) (401) 8.2% (372) 16.7% (806) (829) * 2.8%
Cost of
utilities
and other (2,635) (1,913) 37.7% (3,843) * 31.4% (6,478) (5,118) 26.6%
Gross profit 28,288 26,656 6.1% 27,948 1.2% 56,236 53,699 4.7%
Gross margin 42.5% 45.3% 42.1% 42.3% 45.0%
Cost of healthcare
services as %
of revenue
Direct salary
rate 36.6% 33.8% 34.8% 35.7% 33.2%
Materials rate 15.4% 15.7% 15.8% 15.6% 15.8%
The growth in the cost of salaries and other employee benefits was driven by the expansion of the hospital business, roll-out of new healthcare facilities and launch of new services, some of which are in the early roll-out phase resulting in revenue generation lagging behind the respective salary expense growth. Once the ramp-up phase of the newly launched healthcare facilities and services is completed, we expect a normalisation of the direct salaries rate.
The decrease in the materials rate (expense on direct materials as a percentage of gross revenue) y-o-y as well as q-o-q (to 15.6% and 15.4%, respectively) reflects the benefits of consolidated purchasing power following the acquisition of the pharma business, resulting in revenue outpacing the growth of materials costs.
After the seasonally high 1Q17 in terms of cost of utilities, the respective expense was reduced by 31.4% in 2Q17. The increase in the cost of utilities on a y-o-y basis is due to the growth in some utility tariffs in the country, effective from 4Q16.
Gross profit reached GEL 28.3 million in 2Q17, up 6.1% y-o-y and up 1.2% q-o-q. While our healthcare services business margins remain under pressure due to the roll-out of new healthcare facilities and services, the gross profit margin increased to 42.5% in 2Q17 from 42.1% in 1Q17. This is mainly a result of increasing utilisation of existing facilities and adding elective services at our hospitals.
EBITDA, healthcare services business
(GEL thousands,
unless otherwise Change, Change, Change,
noted) 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 1H17 1H16 Y-o-Y
Operating expenses (9,993) (9,496) 5.2% (11,129) -10.2% (21,122) (18,711) 12.9%
Salaries and other
employee benefits (7,996) (5,254) 52.2% (7,179) 11.4% (15,175) (11,369) 33.5%
General and
administrative
expenses (4,154) (3,517) 18.1% (4,082) 1.8% (8,236) (5,479) 50.3%
Impairment of
receivables (1,033) (1,120) -7.8% (980) 5.4% (2,013) (1,978) 1.8%
Other operating
income 3,190 395 NMF 1,112 186.9% 4,302 115 NMF
EBITDA 18,295 17,160 6.6% 16,819 8.8% 35,114 34,988 0.4%
EBITDA margin 27.5% 29.2% 25.3% 26.4% 29.3%
The healthcare services business operating expenses were down by 10.2% q-o-q leading to a quarterly positive operating leverage of 11.4 percentage points. The increase in operating expenses on a y-o-y basis is primarily driven by the expansion of the business as well as new openings.
The increase in administrative salaries compared to the previous year is mainly attributable to: 1) the overall expansion of the business and roll-out of new healthcare facilities; and 2) an increase in the cost of share based compensation for our employees in managerial positions and the introduction of a new share scheme to our key doctors, to attract, motivate and retain the best quality talent. The increase on a q-o-q basis is mainly due to the launch of Sunstone hospital in 2Q17, the salary expense of which outpaces the hospital revenue generation at this stage.
The y-o-y increase in general and administrative expenses is primarily driven by the expansion of the business, increased marketing activity alongside the roll-out of our Polyclinics, as well as the increased rental costs of the newly launched Polyclinics. Since 2Q16 we have launched five new Polyclinic clusters.
Other operating income mainly comprises rental income, gain from call option, share of profit of associate, gains from the sale of drugs and gains on the sale of property and equipment.
We reported quarterly EBITDA of GEL 18.3 million, up 6.6% y-o-y and up 8.8% q-o-q. The EBITDA margin was up by 220 bps compared to previous quarter but still remains below the last year figure due to the hospital and Polyclinic roll-outs.
The EBITDA margin for our hospitals (both, referral and community) in 1H17 was 27.1% compared to 29.1% in 1H16, due to the roll-out of new facilities and services. The healthcare facilities and services which are still in roll-out phase, posted negative EBITDA of GEL 1.6 million in 2Q17 and GEL 2.7 million in 1H17.
The EBITDA margin of our Polyclinics stood at 15.2% in 1H17 compared to 28.9% in 1H16. After the roll-out phase is completed, towards the end of 2018, we expect the run rate EBITDA margin for our Polyclinics to be 30%+.
Overall, we expect our healthcare services EBITDA margin to rebound gradually up to our initial target.
Profit for the period, healthcare services business
(GEL thousands,
unless otherwise Change, Change, Change,
noted) 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 1H17 1H16 Y-o-Y
Depreciation and
amortisation (5,774) (4,121) 40.1% (4,939) 16.9% (10,713) (8,382) 27.8%
Net interest income
(expense) (4,435) (2,999) 47.9% (4,116) 7.8% (8,551) (5,258) 62.6%
Net gains/(losses)
from foreign currencies 1,118 (1,711) NMF 695 60.9% 1,813 (2,122) NMF
Net non-recurring
income/(expense) (1,255) 387 NMF (1,276) -1.6% (2,531) 157 NMF
Profit before
income tax expense 7,949 8,716 -8.8% 7,183 10.7% 15,132 19,383 -21.9%
Income tax benefit/(expense) - 26,619 NMF (11) -100.0% (11) 28,105 NMF
of which: Deferred
tax adjustments - 27,113 - - 29,311
Profit for the
period 7,949 35,335 -77.5% 7,172 10.8% 15,121 47,488 -68.2%
Attributable to:
- shareholders
of the Company 5,636 29,888 -81.1% 5,764 -2.2% 11,400 39,939 -71.5%
- non-controlling
interests 2,313 5,447 -57.5% 1,408 64.3% 3,721 7,549 -50.7%
of which: Deferred
tax adjustments - 4,705 - - 5,057
The y-o-y increase in depreciation expense in 1Q17 and 1H17 is a result of the increased asset base from our expansion and the associated capex. After launching Sunstone hospital in 2Q17 the depreciation of its buildings and equipment was started, causing the increased depreciation expense q-o-q.
The y-o-y increase in net interest expense reflects the increase in our borrowing levels as explained earlier in this report, on page 8.
The increased 2Q17 gross profit, supported by positive operating leverage, translated into an increase in profit before income tax expense by 10.7% q-o-q. Compared to last year, the trend was downward due to the pressure on margins from the newly launched healthcare facilities and services as well as due to increased interest and depreciation expenses.
Operating performance highlights and notable developments in 2Q17, healthcare services business
-- New Government initiative.
Effective from May 2017, the Government adopted a new regulation which bases UHC coverage eligibility on the income level of citizens as follows:
1) Citizens with income of below GEL 1,000 per month continue to receive the same coverage from UHC, with reimbursement of their healthcare service needs. In addition, coverage of certain additional medicines were introduced for people at a certain level of poverty; 2) Citizens with income more than GEL 1,000 per month but below GEL 40,000 annually are partially covered by UHC with increased co-payments - the extent of the coverage is close to that received under UHC before the new regulation; 3) more than GEL 40,000 annually are excluded from UHC coverage.
The initiative is intended to make UHC spending more efficient and shift part of the spending from Government funded healthcare programmes to out-of-pocket payments by patients and private medical insurance companies. The initiative will support our strategy to further diversify our healthcare services business revenue mix and should benefit our insurance business.
-- Rebranding of our ambulatory clinics and outpatient centers into "Polyclinics"
Due to a better customer perception, we have decided to rebrand our ambulatory clinics into Polyclinics. The word Polyclinic is very well known within the population, awareness is high and remains the preferable description for the outpatient clinic customers. By changing the name of our ambulatories, we aim to position ourselves as the brand-new, well equipped Polyclinics with much better quality, to tap the c.GEL 100 million annual market segment, currently occupied by the post-Soviet style polyclinics.
We have started negotiations with family doctors at post-Soviet era polyclinics and have already recruited 67 doctors. We have also started active marketing campaigns to promote our brand-new Polyclinics, which resulted in 39% increase in the average number of patients visiting our Polyclinics over the last two months.
-- In July 2017, healthcare service business acquired two community hospitals in Khashuri and Qareli regions (together the "Hospitals"). The acquisition is in line with the healthcare services business strategy to expand its presence across the country, especially in underrepresented regions of Georgia. Following the acquisition of these Hospitals, the number of community hospitals in the Group has increased to 22, with 555 beds in total.
The Hospitals are located in the Khashuri and Qareli regions, which have a combined population of c.100,000 people, and they operate with 65 and 25 beds respectively. Both hospitals are the sole healthcare services providers in their respective regions and are next to the new central highway connecting East and West Georgia. Khashuri hospital is also the referral centre for three other nearby towns. This acquisition further enables us to refer patients to our referral hospitals, primarily in Kutaisi and Tbilisi, thus providing potential revenue synergies. Finally, this acquisition will also strengthen our outpatient capacity in these two regions, since our community hospitals are well suited for providing full scale ambulatory services.
-- Our healthcare services market share by number of beds was 24.6% as of 30 June 2017.
-- Our hospital bed occupancy rate(8) was 55.6% in 2Q17 (57.6% in 2Q16, 60.5% in 1Q17) and 58.8% in 1H17 (59.3% in 1H16). Our hospital bed occupancy rate excluding newly opened Sunstone hospital was 59.0% and 61.6% in 2Q17 and 1H17, respectively
-- Our referral hospital bed occupancy rate was 62.2% in 2Q17 (64.9% in 2Q16, 68.1% in 1Q17) and 65.6% in 1H17 (65.8% in 1H16). Our referral hospital bed occupancy rate excluding Sunstone hospital was 67.1% and 69.7% in 2Q17 and 1H17 respectively
-- The average length of stay(9) was 5.3 days in 2Q17 (5.1 in 2Q16, 5.4 in 1Q17) and 5.4 in 1H17 (4.9 in 1H16)
-- The average length of stay at referral hospitals was 5.5 days in 2Q17 (5.3 days in 2Q16, 5.6 days in 1Q17) and 5.6 in 1H17 (5.1 in 1H16)
-- During 2Q17, we continued to invest in the development of our healthcare facilities. We spent a total of GEL 13.6 million on capital expenditures, primarily on the extensive renovations of Deka and Sunstone hospitals, as well as enhancing our service mix and introducing new services to cater to previously unmet patient needs. Of this, maintenance capex was GEL 2.6 million.
-- We continued the process of launching new services at our referral hospitals. This includes services like paediatrics, neonatology, diagnostics, ophthalmology, mammography and breast surgery, gynaecology, cardio-surgery, traumatology, angio-surgery, intensive care and reproductive services. More sophisticated services launched include: oncology, transplantation of bone marrow and paediatric kidney transplant. During 2Q17, we have launched 10 new services in 7 different referral hospitals. In total during 1H17 we have launched 21 new services. In 2017, we plan to launch more than 60 new services in 14 hospitals.
-- The renovation of the first phase of Sunstone (c.332 beds) was completed two months ahead of the initial schedule, within budget. In April 2017, we opened the hospital with 220 newly renovated beds and in June the hospital already reached 26.4% occupancy rate per bed. The full launch of the 332-bed Sunstone hospital is planned by the end of this year, in line with the expected increase in demand.
-- The renovation and full launch of Deka (c.320 beds) is on budget and on target for completion by year-end. In August 2016, we opened Deka's diagnostic centre, which is one of the largest in Tbilisi. The opening of the diagnostic centre was the first step toward developing Deka into a flagship multi-profile hospital in Georgia.
-- We also expanded the number of specialties offered in our residency programme in line with our strategy to develop a new generation of doctors. In 2Q17 we obtained accreditation in an additional three specialties bringing the total number of specialties to 23. This increased the total number of slots for admission to the programme by six residents, bringing the total number of slots for admission to 240 residents. Currently 112 residents are involved in our residency programme. To incentivise and support top talent's enrollment, we offer grants, student loans and employment after graduating from our residency programme.
(8) This calculation excludes emergency beds
(9) This calculation excludes data for the emergency department
Discussion of Pharma Business Results
Our results of operations for the 2Q16 and 1H16 include only GPC results, which we have been consolidating since May 2016. Starting from 1Q17 our results include GPC's and Pharmadepot's combined results (consolidation of Pharmadepot started from January 2017). Accordingly, only 2Q17 and 1Q17 figures are comparable.
Income Statement, pharma business
May-
GEL thousands; unless Change, June
otherwise noted 2Q17 1Q17 Q-o-Q 1H17 2016
Pharma revenue 110,942 111,399 -0.4% 222,341 30,691
Costs of pharma (84,822) (84,408) 0.5% (169,230) (25,059)
Gross profit 26,120 26,991 -3.2% 53,111 5,632
Salaries and other employee
benefits (9,684) (9,616) 0.7% (19,300) (2,690)
General and administrative
expenses (7,229) (8,762) -17.5% (15,991) (2,480)
Impairment of receivables (103) (28) 267.9% (131) -
Other operating income (183) 101 NMF (82) 92
EBITDA 8,921 8,686 2.7% 17,607 554
EBITDA margin 8.0% 7.8% 7.9% 1.8%
Depreciation and amortisation (465) (711) -34.6% (1,176) (258)
Net interest income (expense) (3,187) (2,793) 14.1% (5,980) (427)
Net gains/(losses) from
foreign currencies (180) 2,095 NMF 1,915 (272)
Net non-recurring income/(expense) (566) (316) 79.1% (882) -
Profit before income
tax expense 4,523 6,961 -35.0% 11,484 (403)
Income tax benefit/(expense) 222 (8) NMF 214 NMF
Deferred tax adjustments - - - - -
Profit for the period 4,745 6,953 -31.8% 11,698 (403)
We have now largely completed the integration process of the two pharma companies. The process is gone smoothly and we are on track within the expected schedule. Still in process is the integration of our two pharma warehouses, which we expect to finalise by the end of this year. Successful completion of that project will enable us to reduce and better manage the level of stock inventory.
The pharma business revenue was GEL 110.9 million in 2Q17, largely flat q-o-q reflecting the impact of the companies integration process. We started the integration process of the most important pillar - customer software, in May and whilst the process went smoothly, some minor interruptions in GPC negatively affected revenue by an estimated GEL 2 million. The system is now fully operational. The revenue mix by sales channels was: retail GEL 82.5 million (74.3% of total) in 2Q17 and GEL 167.7 million in (75.4% of total) 1H17; and wholesale GEL 24.9 million (22.5% of total) in 2Q17 and GEL 54.6 million in (24.6% of total) 1H17. The share of para-pharmacies in retail revenue was 28.2% in 2Q17 and 28.4% in 1H17.
The cost of pharma (cost of goods sold) rose slightly in 2Q17, mainly due to sales in April 2017 of inventory purchased previously at high foreign currency exchange rate.
The combined pharma business continuous to deliver its synergy targets. Through renegotiations with manufacturers for additional discounts we have already achieved GEL 7.0 million procurement synergies on an annualised basis. In line with our strategy to add high margin products to our product mix, in 1H17 we added 5 new contract manufactured and 16 new generic products.
Consequently, pharma business gross profit was GEL 26.1 million, which has resulted in a gross margin of 23.5% in 2Q17, compared to 24.2% in 1Q17. In May and June the exchange rate impact noted above unwound and gross margin returned to 24.2% and we expect further improvement in this measure now as the business integration process has been largely completed.
Salaries and other employee benefits were well controlled and maintained broadly unchanged. The decrease in general and administrative expenses, down by 17.5% q-o-q, is mainly due to: 1) renegotiation of existing agreement terms for better rental cost of pharmacies; 2) less marketing costs in the second quarter; and 3) decrease in the cost of utilities after the winter season.
The pharma business reported EBITDA of GEL 8.9 million and GEL 17.6 million in 2Q17 and HY17, while delivering quarterly and half yearly EBITDA margins of 8.0% and 7.9% respectively, nearing our more than 8% target in the medium-term. Positive operating leverage of 2.8 percentage points was delivered q-o-q.
The q-o-q interest expense was up by 14.1% as the funds incurred for the Pharmadepot acquisition were raised in the middle of January 2017, causing increased interest expense in 2Q17.
Consequently, the pharma business reported a net profit of GEL 4.7 million in 2Q17, down by 31.8% q-o-q but remained largely flat q-o-q excluding the foreign currency gain in 1Q17. Profit reached GEL 11.7 million in 1H17.
Operating highlights and notable developments in 2Q17, pharma business:
-- After the acquisition of Pharmadepot we continued negotiations with manufacturers for additional discounts, as a result of the increased consolidated purchasing power of our healthcare services and pharma businesses. In line with our initial guidance, we have already delivered GEL 7.0 million procurement synergies on an annualised basis out of an expected GEL 7.9 million on an annualised basis in 2017.
-- After the acquisition of Pharmadepot we successfully continued to eliminate unnecessary costs. We have already eliminated GEL 1.7 million compared to initial guidance of GEL 3.9 million, on an annualised basis.
-- We also accelerated the procurement of medical disposables for our healthcare services business through our pharma business. In 2Q17, we had GEL 1.1 million in intercompany purchases, compared to GEL 0.8 million in 2Q16.
-- In total, we operate a country-wide distribution network of 247 pharmacies in major cities. The number of our pharmacies located in our hospitals and clinics totals 21.
-- In 2Q17, the pharma business had:
-- c.2.1 million retail customer interactions per month
-- c.0.5 million loyalty card members
-- Average bill size of GEL 13.3
-- 29% market share measured by sales
-- Total number of bills issued was 6.3 million
Discussion of Medical Insurance Business Results
Income Statement, medical insurance business
GEL thousands;
unless otherwise Change, Change, Change,
noted 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 1H17 1H16 Y-o-Y
Net insurance premiums
earned 13,410 15,298 -12.3% 13,965 -4.0% 27,375 29,128 -6.0%
Cost of insurance
services (12,718) (13,989) -9.1% (12,734) -0.1% (25,452) (26,836) -5.2%
Gross profit 692 1,309 -47.1% 1,231 -43.8% 1,923 2,292 -16.1%
Salaries and other
employee benefits (972) (1,328) -26.8% (1,048) -7.3% (2,020) (2,147) -5.9%
General and administrative
expenses (366) (708) -48.3% (507) -27.8% (873) (1,309) -33.3%
Impairment of receivables (117) (116) 0.9% (113) 3.5% (230) (238) -3.4%
Other operating
income (18) 10 NMF (7) NMF (25) (129) -80.6%
EBITDA (781) (832) -6.1% (444) 75.9% (1,225) (1,531) -20.0%
EBITDA margin -5.8% -5.4% -3.2% -4.5% -5.3%
Depreciation and
amortisation (242) (202) 19.8% (222) 9.0% (464) (406) 14.3%
Net interest income
(expense) (206) (43) NMF (210) -1.9% (416) 560 -174.3%
Net gains/(losses)
from foreign currencies 48 19 152.6% (12) NMF 36 170 -78.8%
Net non-recurring
income/(expense) 2 (973) NMF (200) -101.0% (198) (973) -79.7%
Profit before income
tax expense (1,179) (2,031) -41.9% (1,088) 8.4% (2,267) (2,180) 4.0%
Income tax benefit/(expense) (310) 301 NMF - NMF (310) 320 NMF
Deferred tax adjustments - - - - - - -
(Loss) / Profit
for the period (1,489) (1,730) -13.9% (1,088) 36.9% (2,577) (1,860) 38.5%
Medical insurance business revenue. Our medical insurance business contributed GEL 13.4 million to the Group's revenue in 2Q17 (down 12.3% y-o-y and down 4.0% q-o-q) and GEL 27.4 million in 1H17 (down 6.0% y-o-y). The decrease in insurance premiums earned is due to the expiration of the MOD contract which was allowed to expire in January 2017 due to the high loss ratio.
Gross profit, medical insurance business
(GEL thousands, unless otherwise Change, Change, Change, noted) 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 1H17 1H16 Y-o-Y Cost of insurance services (12,718) (13,989) -9.1% (12,734) -0.1% (25,452) (26,836) -5.2% Net insurance claims incurred (11,936) (13,003) -8.2% (11,812) 1.0% (23,748) (24,956) -4.8% Agents, brokers and employee commissions (782) (986) -20.7% (922) -15.2% (1,704) (1,880) -9.4% Gross profit 692 1,309 -47.1% 1,231 -43.8% 1,923 2,292 -16.1% Loss ratio 89.0% 85.0% 84.6% 86.8% 85.7%
Our insurance business plays a good feeder role in originating and directing patients to our healthcare facilities, mainly to Polyclinics and to pharmacies. In 2Q17, our medical insurance claims expense was GEL 11.9 million, of which GEL 4.8 million (39.8 % of total) was inpatient, GEL 4.3 million (36.4 % of total) was outpatient and GEL 2.8 million (23.7 % of total) accounted for drugs. In 2Q17, GEL 4.5 million, or 38.1 % (25.2% in 2Q16) of our total medical insurance claims were retained within the Group, of which GEL 2.7 million and GEL 1.8 million were retained in the healthcare services and pharma businesses respectively. The feeder role of our medical insurance business is particularly important for the Group's outpatient services. In 1H17, GEL 3.3 million, or 34.4%, of our medical insurance claims on outpatient services were retained within the Group, which represents an increase of 13.6 ppts. With our recently launched Polyclinics initiative and expansion strategy, the retention rate should improve further in the future, on a larger base, providing a significant revenue boost for our healthcare services business. In addition, following the expansion of our healthcare services business in referral hospitals in Tbilisi, where our medical insurance business has the highest concentration of its insured clients, more of our medical insurance customers will be utilising more of our hospitals. Our facilities are increasingly favoured by these customers over competitor facilities due to the better quality of service, access to one-stop-shop style Polyclinics and the ease of claim reimbursement procedures.
Recent changes that removed insured individuals from UHC coverage and redefined UHC eligibility criteria for citizens based on their income level, increased the cost per insured client, leading to an increase in c.GEL 300,000 per month in claims. According to contracts between us and our insured clients, the medical insurance business had the right to amend or terminate the contracts in case of material changes in the market. The medical insurance business has already started to terminate contracts that have become loss-making as a result of this change, or has adjusted package pricing in existing contracts. The impact of this effort has already been reflected and our medical insurance business achieved positive EBITDA in July.
Gross profit recorded was GEL 0.7 million in 2Q17 (down by 47.1% y-o-y and down by 43.8% q-o-q) and GEL 1.9 million (down 16.1% y-o-y) in 1H17.
The decrease in general and administrative expenses y-o-y is a result of savings in rent expense due to relocation to a new office, as well as decreasing administrative expenses due to the re-negotiation of terms and conditions with different service providers. There were further savings on marketing costs as well as decreased utilities expenses.
We continue to expect an improved loss ratio for our medical insurance business and to reach our 2018 targets of a loss ratio less than 80% and c.14% expense ratio (excluding commissions). Our medical insurance business recorded GEL 0.8 million negative EBITDA, compared to negative EBITDA of GEL 0.8 million and 0.4 million in 2Q16 and in 1Q17.
Operating highlights and notable developments in 2Q17, medical insurance business
-- The number of persons insured was 135,000 as at 30 June 2017
-- Our medical insurance market share was 30.9% based on net insurance premium revenue, as at 31 March 2017
-- Our insurance renewal rate was 73.4% in 2Q17
SELECTED FINANCIAL INFORMATION
Income Statement,
half- year Healthcare services Pharma Medical insurance Eliminations GHG
GEL thousands;
unless otherwise
noted Change, (May-June) Change, Change,
1H17 1H16 Y-o-Y 1H17 1H16(10) 1H17 1H16 Y-o-Y 1H17 1H16 1H17 1H16 Y-o-Y
Revenue, gross 132,948 119,230 11.5% 222,341 30,691 27,375 29,128 -6.0% (11,616) (4,800) 371,048 174,249 112.9%
Corrections &
rebates (1,283) (1,134) 13.1% - - - - - - - (1,283) (1,134) 13.1%
Revenue, net 131,665 118,096 11.5% 222,341 30,691 27,375 29,128 -6.0% (11,616) (4,800) 369,765 173,115 113.6%
Costs of services (75,429) (64,397) 17.1% (169,230) (25,059) (25,452) (26,836) -5.2% 10,118 4,746 (259,993) (111,546) 133.1%
Cost of salaries
and other employee
benefits (47,438) (39,609) 19.8% - - - - - 1,784 1,659 (45,654) (37,950) 20.3%
Cost of materials
and supplies (20,707) (18,841) 9.9% - - - - - 2,945 789 (17,762) (18,052) -1.6%
Cost of medical
service providers (806) (829) -2.8% - - - - - 31 35 (775) (794) -2.4%
Cost of utilities
and other (6,478) (5,118) 26.6% - - - - - 244 214 (6,234) (4,904) 27.1%
Net insurance
claims incurred - - - - - (23,748) (24,956) -4.8% 5,114 2,049 (18,634) (22,907) -18.7%
Agents, brokers
and employee
commissions - - - - - (1,704) (1,880) -9.4% - (1,704) (1,880) -9.4%
Cost of pharma
- wholesale - - - (45,485) (6,545) - - - - - (45,485) (6,545) NMF
Cost of pharma
- retail - - - (123,745) (18,514) - - - - - (123,745) (18,514) NMF
Gross profit 56,236 53,699 4.7% 53,111 5,632 1,923 2,292 -16.1% (1,498) (54) 109,772 61,569 78.3%
Salaries and other
employee benefits (15,175) (11,369) 33.5% (19,300) (2,690) (2,020) (2,147) -5.9% 343 54 (36,152) (16,152) 123.8%
General and
administrative
expenses (8,236) (5,479) 50.3% (15,991) (2,480) (873) (1,309) -33.3% 348 - (24,752) (9,268) 167.1%
Impairment of
receivables (2,013) (1,978) 1.8% (131) - (230) (238) -3.4% 250 - (2,124) (2,216) -4.2%
Other operating
income 4,302 115 NMF (82) 92 (25) (129) -80.6% 216 - 4,411 78 NMF
EBITDA 35,114 34,988 0.4% 17,607 554 (1,225) (1,531) -20.0% (341) - 51,155 34,011 50.4%
EBITDA margin 26.4% 29.3% 7.9% 1.8% -4.5% -5.3% - 13.8% 19.5%
Depreciation and
amortisation (10,713) (8,382) 27.8% (1,176) (258) (464) (406) 14.3% - - (12,353) (9,046) 36.6%
Net interest income
(expense) (8,551) (5,258) 62.6% (5,980) (427) (416) 560 NMF - - (14,947) (5,125) 191.6%
Net gains/(losses)
from foreign
currencies 1,813 (2,122) NMF 1,915 (272) 36 170 -78.8% - - 3,764 (2,224) NMF
Net non-recurring
income/(expense) (2,531) 157 NMF (882) - (198) (973) -79.7% 341 - (3,270) (816) NMF
Profit before
income tax expense 15,132 19,383 -21.9% 11,484 (403) (2,267) (2,180) 4.0% - - 24,349 16,800 44.9%
Income tax
benefit/(expense) (11) 28,105 NMF 214 - (310) 320 NMF - - (107) 28,425 NMF
of which:
Deferred
tax
adjustments - 29,311 - - 29,311
Profit for the
period 15,121 47,488 -68.2% 11,698 (403) (2,577) (1,860) 38.5% - - 24,242 45,225 -46.4%
Attributable to:
- shareholders
of the Company 11,400 39,939 -71.5% 6,181 (403) (2,577) (1,860) 38.5% - - 15,004 37,676 -60.2%
- non-controlling
interests 3,721 7,549 -50.7% 5,517 - - - - - - 9,238 7,549 22.4%
of which:
Deferred
tax
adjustments 5,057 - - - - - 5,057
(10) 1H16 includes only May-June GPC's results
Income Statement, Quarterly Healthcare services Pharma Medical insurance Eliminations GHG GEL thousands; unless otherwise Change, Change, Change, Change, Change, Change, Change, Change, noted 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 2Q17 2Q16(11) Y-o-Y 1Q17 Q-o-Q 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q 2Q17 2Q16 1Q17 2Q17 2Q16 Y-o-Y 1Q17 Q-o-Q Revenue, gross 66,600 58,779 13.3% 66,348 0.4% 110,942 30,691 261.5% 111,399 -0.4% 13,410 15,298 -12.3% 13,965 -4.0% (6,351) (3,095) (5,265) 184,601 101,673 81.6% 186,447 -1.0% Corrections & rebates (660) (724) -8.8% (623) 5.9% - - - - - - - - - - - (660) (724) -8.8% (623) 5.9% Revenue, net 65,940 58,055 13.6% 65,725 0.3% 110,942 30,691 261.5% 111,399 -0.4% 13,410 15,298 -12.3% 13,965 -4.0% (6,351) (3,095) (5,265) 183,941 100,949 82.2% 185,824 -1.0% Costs of services (37,652) (31,399) 19.9% (37,777) -0.3% (84,822) (25,059) 238.5% (84,408) 0.5% (12,718) (13,989) -9.1% (12,734) -0.1% 4,945 3,052 5,173 (130,247) (67,395) 93.3% (129,746) 0.4% Cost of salaries and other employee benefits (24,343) (19,857) 22.6% (23,095) 5.4% - - - - - - - - - - 929 1,094 855 (23,414) (18,763) 24.8% (22,240) 5.3% Cost of materials and supplies (10,240) (9,228) 11.0% (10,467) -2.2% - - - - - - - - - - 1,582 514 1,363 (8,658) (8,714) -0.6% (9,104) -4.9% Cost of medical service providers (434) (401) 8.2% (372) 16.7% - - - - - - - - - - 17 23 14 (417) (378) 10.3% (358) 16.5% Cost of utilities and other (2,635) (1,913) 37.7% (3,843) -31.4% - - - - - - - - - - 102 122 142 (2,533) (1,791) 41.4% (3,701) -31.6% Net insurance claims incurred - - - - - - - - - - (11,936) (13,003) -8.2% (11,812) 1.0% 2,315 1,299 2,799 (9,621) (11,704) -17.8% (9,013) 6.7% Agents, brokers and employee commissions - - - - - - - - - - (782) (986) -20.7% (922) -15.2% - - - (782) (986) -20.7% (922) -15.2% Cost of pharma - wholesale - - - - - (22,989) (6,545) 251.2% (22,496) - - - - - - - - - (22,989) (6,545) 251.2% (22,496) 2.2% Cost of pharma - retail - - - - - (61,833) (18,514) 234.0% (61,912) - - - - - - - - - (61,833) (18,514) 234.0% (61,912) -0.1% Gross profit 28,288 26,656 6.1% 27,948 1.2% 26,120 5,632 363.8% 26,991 -3.2% 692 1,309 -47.1% 1,231 -43.8% (1,406) (43) (92) 53,694 33,554 60.0% 56,078 -4.3% Salaries and other employee benefits (7,996) (5,254) 52.2% (7,179) 11.4% (9,684) (2,690) 260.0% (9,616) 0.7% (972) (1,328) -26.8% (1,048) -7.3% 227 43 116 (18,424) (9,229) 99.6% (17,728) 3.9% General and administrative expenses (4,154) (3,517) 18.1% (4,082) 1.8% (7,229) (2,480) 191.5% (8,762) -17.5% (366) (708) -48.3% (507) -27.8% 348 - - (11,400) (6,705) 70.0% (13,352) -14.6% Impairment of other receivables (1,033) (1,120) -7.8% (980) 5.4% (103) - - (28) 267.9% (117) (116) 0.9% (113) 3.5% 250 - - (1,003) (1,236) -18.9% (1,121) -10.5% Other operating income 3,190 395 NMF 1,112 186.9% (183) 92 -298.9% 101 -281.2% (18) 10 NMF (7) NMF 240 - (24) 3,229 497 NMF 1,182 173.2% EBITDA 18,295 17,160 6.6% 16,819 8.8% 8,921 554 NMF 8,686 2.7% (781) (832) -6.1% (444) 75.9% (341) - - 26,096 16,882 54.6% 25,059 4.1% EBITDA margin 27.5% 29.2% 25.3% 8.0% 1.8% - 7.8% -5.8% -5.4% -3.2% - - 14.1% 16.6% 13.4% Depreciation and amortisation (5,774) (4,121) 40.1% (4,939) 16.9% (465) (258) 80.2% (711) -34.6% (242) (202) 19.8% (222) 9.0% - - - (6,481) (4,581) 41.5% (5,872) 10.4% Net interest income (expense) (4,435) (2,999) 47.9% (4,116) 7.8% (3,187) (427) NMF (2,793) 14.1% (206) (43) NMF (210) NMF - - - (7,828) (3,469) 125.7% (7,119) 10.0% Net gains/(losses) from foreign currencies 1,118 (1,711) NMF 695 60.9% (180) (272) -33.8% 2,095 -108.6% 48 19 152.6% (12) NMF - - - 986 (1,964) NMF 2,778 -64.5% Net non-recurring income/(expense) (1,255) 387 NMF (1,276) -1.6% (566) - NMF (316) NMF 2 (973) NMF (200) - 341 - - (1,478) (586) NMF (1,792) -17.5% Profit before income tax expense 7,949 8,716 -8.8% 7,183 10.7% 4,523 (403) NMF 6,961 -35.0% (1,179) (2,031) -41.9% (1,088) 8.4% - - - 11,295 6,282 79.8% 13,054 -13.5% Income tax benefit/(expense) - 26,619 NMF (11) NMF 222 - - (8) NMF (310) 301 NMF - NMF - - - (88) 26,920 NMF (19) NMF of which: Deferred tax adjustments - 27,113 - - - - - - - - - - - - - - 27,113 NMF - - Profit for the period 7,949 35,335 -77.5% 7,172 10.8% 4,745 (403) NMF 6,953 -31.8% (1,489) (1,730) -13.9% (1,088) 36.9% - - - 11,207 33,202 -66.2% 13,035 -14.0% Attributable to: - shareholders of the Company 5,636 29,888 -81.1% 5,764 -2.2% 2,024 (403) NMF 4,157 -51.3% (1,489) (1,730) -13.9% (1,088) 36.9% - - - 6,172 27,755 -77.8% 8,832 -30.1% - non-controlling
interests 2,313 5,447 -57.5% 1,408 64.3% 2,721 - - 2,796 -2.7% - - - - - - - - 5,035 5,447 -7.6% 4,203 19.8%
of which:
Deferred
tax adjustments - 4,705 - - - - - - - - - - - 4,705 -
(11) 2Q16 includes only May-June results
Selected
Balance
Sheet items Healthcare services Pharma Medical insurance
GEL thousands;
unless
otherwise Change, Change, Change, Change, Change, Change,
noted 30-Jun-17 30-Jun-16 Y-o-Y 31-Mar-17 Q-o-Q 30-Jun-17 30-Jun-16 Y-o-Y 31-Mar-17 Q-o-Q 30-Jun-17 30-Jun-16 Y-o-Y 31-Mar-17 Q-o-Q
Assets:
Cash and bank
deposits 21,741 12,551 73.2% 82,893 -73.8% 5,548 1,853 199.4% 6,924 -19.9% 9,763 11,991 -18.6% 10,412 -6.2%
Property and
equipment 582,437 488,105 19.3% 579,505 0.5% 23,746 7,950 192.5% 22,922 1.5% 5,976 5,684 5.1% 6,002 -0.4%
Inventory 14,787 8,552 72.9% 14,282 3.5% 92,167 33,692 173.6% 82,256 12.0% 215 226 -4.9% 212 1.4%
Liabilities:
Borrowed
Funds 189,600 120,897 56.8% 228,596 -17.1% 81,764 18,020 353.7% 83,463 -100.0% 9,120 11,942 -23.6% 9,032 1.0%
Accounts
payable 34,616 25,156 37.6% 41,844 -17.3% 58,015 31,122 86.4% 63,440 0.0% - - - - -
Selected Balance Consolidation
Sheet items and eliminations GHG
GEL thousands;
unless otherwise Change, Change,
noted 30-Jun-17 30-Jun-16 31-Mar-17 30-Jun-17 30-Jun-16 Y-o-Y 31-Mar-17 Q-o-Q
Assets
Cash and bank
deposits - - - 37,052 26,395 40.4% 100,229 -63.0%
Property and
equipment - - - 612,159 501,739 22.0% 608,429 0.6%
Inventory - - - 107,169 42,470 152.3% 96,750 10.8%
Liabilities:
Borrowed Funds (0) (9,602) - 280,483 141,257 98.6% 321,091 -12.6%
Accounts payable (4,939) (3,696) (11,159) 87,691 52,582 66.8% 94,125 -6.8%
Selected ratios and KPIs 2Q17 2Q16 1Q17 1H17 1H16
GHG
EPS, GEL 0.05 0.08(12) 0.07 0.12 0.15(12)
ROAE(13) 5.3% 25.1% 7.4% 6.3% 17.2%
ROAE, normalised 9.7% 12.8% 13.4% 11.4% 14.2%
Group rent expenditure 4,728 2,266 5,019 9,747 2,670
of which, Pharma 4,216 1,642 4,485 8,701 1,642
Group capex (maintenance) 2,586 2,053 2,630 5,216 4,590
Group capex (growth) 21,071 29,895 17,866 38,937 44,252
Number of employees 14,759 11,884 14,593 14,759 11,884
Number of physicians 3,352 2,954 3,278 3,352 2,954
Number of nurses 3,101 2,795 2,980 3,101 2,795
Nurse to doctor ratio,
referral hospitals 0.95 0.95 0.93 0.95 0.95
Total number of shares 131,681,820 131,681,820 131,681,820 131,681,820 131,681,820
Less: Treasury shares (3,452,534) (3,500,000) (3,452,534) (3,452,534) (3,500,000)
Shares outstanding 128,229,286 128,181,820 128,229,286 128,229,286 128,181,820
Of which:
Total free float 53,110,783 42,550,000 42,610,783 43,610,783 42,550,000
Shares held by BGEO GROUP
PLC 75,118,503 85,631,820 84,618,503 84,618,503 85,631,820
Healthcare services
EBITDA margin of healthcare
services 27.5% 29.2% 25.3% 26.4% 29.3%
Direct salary rate (direct
salary as % of revenue) 36.6% 33.8% 34.8% 35.7% 33.2%
Materials rate (direct
materials as % of revenue) 15.4% 15.7% 15.8% 15.6% 15.8%
Administrative salary
rate (administrative
salaries as % of revenue) 12.0% 8.9% 10.8% 11.4% 9.5%
SG&A rate (SG&A expenses
as % of revenue) 6.2% 6.0% 6.2% 6.2% 5.0%
Number of hospitals 35 47 35 35 47
Number of Polyclinics 13 7 13 13 7
Number of express outpatient
clinics 24 28 28 24 28
Number of beds 2,731 2,467 2,557 2,731 2,467
Number of referral hospital
beds 2,266 2,005 2,092 2,266 2,005
Bed occupancy rate 55.6%(14) 57.6% 60.5% 58.8% 59.3%
Bed occupancy rate, referral
hospitals 62.2%(15) 64.9% 68.1% 65.6% 65.8%
Bed occupancy rate, community
hospitals 23.5% 23.9% 24.0% 23.9% 22.4%
Average length of stay
(days) 5.3 5.1 5.4 5.4 4.9
Average length of stay
(days), referral hospitals 5.5 5.3 5.6 5.6 5.1
Average length of stay
(days), community hospitals 4.0 3.9 3.9 3.9 3.4
Pharma
EBITDA margin 8.0% 1.8% 7.8% 7.9% 1.8%
Number of bills issued 6.29mln 1.92mln 6.39mln 12.70mln 1.92mln
Average bill size 13.3 13.0 13.4 13.3 13.0
Revenue from wholesale
as a percentage of total
revenue from pharma 26% 25% 27% 25% 25%
Revenue from retail as
a percentage of total
revenue from pharma 74% 75% 73% 75% 75%
Revenue from para-pharmacy
as a percentage of retail
revenue from pharma 28.2% 31.0% 30.9% 28.4% 31.0%
Number of pharmacies 247 118 245 247 118
Medical insurance
Loss ratio 89.0% 85.0% 84.6% 86.8% 85.7%
Expense ratio, of which 18.6% 21.8% 20.2% 19.4% 21.0%
Commission ratio 5.8% 6.4% 6.6% 6.2% 6.5%
Combined ratio 107.6% 106.8% 104.8% 106.2% 106.6%
Renewal rate 73.4% 75.7% 77.3% 75.3% 75.7%
(12) Normalised as explained in footnote 1 on page 4.
(13) Normalised as explained in footnote 2 on page 4.
(14) Bed occupancy rate, excluding Sunstone hospital was 59.0% and 61.6% in 2Q17 and 1H17 respectively
(15) Referral hospital bed occupancy rate, excluding Sunstone hospital was 67.1% and 69.7% in 2Q17 and 1H17 respectively
Principal risks and uncertainties
The table below describes the principal risks and uncertainties faced by the Group. These principal risks are described in the table that follows, together with the relevant strategic business objectives, key risk drivers/trends and material controls which have been put in place to mitigate the principal risks and the mitigation actions we have taken. It is recognised that the Group is exposed to risks wider than those listed.
The order in which the Principal Risks and Uncertainties appear does not denote their order of priority. It is not possible to fully mitigate all of our risks. Any system of risk management and internal control is designed to manage rather than eliminate the risk of failure to our achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
Principal Risk/Uncertainty Key Drivers/Trends Mitigation
----------------------------------------------------------------------- ----------------------------- --------------------------------
Integration
----------------------------------------------------------------------- ----------------------------- --------------------------------
The Group has grown In May 2016 and The integration
in size, and added January 2017, team meets at least
sectors, through the Group completed weekly to discuss
acquisitions including the acquisition all aspects of
its pharmaceutical of JSC GPC and the pharmacy integration
businesses. JSC ABC Pharmacia process, including
(brand name Pharmadepot) but not limited
The Group may face respectively, to strategy, financial,
challenges in integrating adding new business commercial, clinical,
its new businesses lines of pharmaceutical IT, human resources
into the existing retail and wholesale and legal matters.
Group. Challenges chains.
could include but The wider team
are not limited Starting from involved in integration
to the full integration January 2017, are highly skilled
of IT systems, a GPC and ABC are and experienced,
lack of human resources being merged into having carried
and failure to achieve a single company out over 30 integrations
expected synergies. and single operating and acquisitions
unit named JSC in the last six
Impact GEPHA. years.
Failure to integrate
successfully would Key personnel and
adversely affect management from
anticipated synergies, GPC and ABC Pharmacia
our strategy, projected have joined the
growth and revenues. Company to ensure
business continuity
including GPC's
CEO, and ABC Pharmacia's
CEO and COO.
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Compliance
----------------------------------------------------------------------- ----------------------------- --------------------------------
The Group operates Changes to the Engaging in constructive
across the healthcare UHC were introduced dialogue with regulatory
ecosystem and is in 2017 in respect and Governmental
subject to a complex of certain categories bodies, where possible,
spectrum of laws, of insured persons, and seek external
regulations and further explained advice on potential
codes. on page 14. changes to legislation.
The Group operates In October 2014, The Group has policies,
in an emerging and an anti-monopoly procedures and
developing market agency was established controls to fulfil
in which legislation and antimonopoly our compliance
is evolving and legislation was obligations, for
there may be further implemented in example, Infection
changes which affect respect of certain Control Management,
the Group's business. operations. We Quality Management,
expect that such Sentinel Event.
Impact legislation may Management and
Non-compliance with have an impact Waste Management.
applicable laws, on our acquisitions
regulations, codes, as we will be The Group's Legal
authority or regulatory required to seek Department is involved
requirements, including prior approval in every material
those specific to from the Competition contract and advises
tax, insurance or Authority to proceed on contractual
healthcare, or the with certain future disputes and litigations.
settling of disputes acquisitions.
or law suits, could The Tax Unit of
lead to financial The Group is involved the Finance Department
detriment, penalties, in contractual follows changes
increased costs and other disputes in tax legislation
of operations, censure, and litigation. and initiatives,
regulatory investigation checks compliance
and reputational Our healthcare with rules and
impact. service business is involved in
includes a network significant contracts.
Inadequate record of different hospitals
keeping or documentation and a nationwide The Company has
of medical matters chain of ambulatory extensive process
and patient data clinics, each management systems
could lead to medical of which must in place to ensure
or administrative comply with extensive that all documentation
errors and regulatory documentation is carried out
breaches which could requirements and to a consistent
impact our financial documentation standard and in
performance. maintenance requirements. compliance with
Georgian regulatory
Regulatory Authorites requirements.
(Social Services
Agency and state Regular Audits
supervision agency are carried out
of medical activities) internally by a
conduct periodic team of experienced
inspections of practitioners and
Group clinics a quality control
in order to determine unit. Their programme
the compliance and audit results
with relevant in respect of medical
regulatory requirements. documentation are
reviewed by the
Clinical Quality
and Safety Committee
every quarter.
Outcomes and changes
to process are
circulated throughout
the Group.
Our recently formed
Regulatory Risks
unit is tasked
to perform a consolidated
review of all key
regulatory compliance
risks within the
network of the
Group's clinics,
analyze and report
on findings identified
as a result of
the inspections
carried out by
the unit as well
as by the Regulatory
Authorities from
2012 to 2016 and
prepare a detailed
amendment action
plan for each individual
clinic in order
to mitigate risk
of future non-compliance.
----------------------------------------------------------------------- ----------------------------- --------------------------------
Availability, Recruitment
and
Retention of Skilled
Medical Practitioners
----------------------------------------------------------------------- ----------------------------- --------------------------------
Our performance There is a shortage We prioritise investment
depends on of suitably skilled in recruitment
our ability doctors, nurses and talent development
to recruit and other healthcare programmes, training
and retain professionals in and retention of
high quality Georgia. our professionals.
doctors, nurses
and other healthcare Our hospital and We continue to
professionals. outpatient network expand our nurse
has grown rapidly college, residency
The success during 2016 and programme and specialities
of our healthcare H1 2017 and requires covered in order
services depends human resources to source specialists
in part on with the skills in the fields where
our ability and experience to we have a shortage
to recruit, service it across of doctors. Incentives
train and retain a range of specialties. are offered to
an appropriate graduates of the
number of highly programme to accept
skilled physicians, employment within
nurses, technicians our network.
and other healthcare
professionals Engagement with
in order to medical schools
deliver international and nursing programmes
standards of as well as our
care, offer scholarship programmes
greater diversity provide us access
of services to recruit talented
to better satisfy graduates.
our population's
needs and provide Our Evex learning
the latest centre, the only
treatments continuing education
using technologically centre of its kind
advanced equipment. in Georgia, trained
over 4,200 doctors
Impact and nurses in 2016.
If we are unable
to effectively Talent and training
attract, recruit development programmes
and retain to enhance the
qualified doctors, skills of our highly
nurses and experienced specialist
other healthcare doctors and nurses
professionals, well as create
our ability an internal talent
to provide pipeline of younger
efficient and doctors and nurses
diverse healthcare has been successful
services and in expanding our
sophisticated specialist capability.
treatments We also offer programmes
as well as for doctors to
retain and study abroad and
attract new receive on-the-job
patients, our training by our
business and own specialists
results of and doctors from
operations abroad. We continue
may be adversely to expand our training
affected. and development
programmes to a
larger group of
doctors and nurses.
In order to retain
our professionals
and motivate them
to perform to the
best of their ability,
we operate incentives
schemes, which
for example offer
bonuses and enhanced
benefits.
--------------------------------------------------------------------- ------------------------------- --------------------------------
Clinical Risk
----------------------------------------------------------------------- ----------------------------- --------------------------------
An epidemic or outbreak Our operations We continue to
of infectious and involve the treatment prioritise and
communicable disease of patients with enhance our infection
at any of our facilities a variety of infectious and communicable
could adversely and communicable disease control
affect our business. diseases. and prevention
programme.
If our hospitals
fail to accurately The programme of
or timely diagnose, initiatives on
or to comply with infection and disease
internationally control and prevention
recognised clinical expanded further
care and quality in H1 2017 to increase
standards and protocols support units in
for infection and our facilities
communicable disease and training throughout
control and prevention, our network.
previously healthy
or uninfected people We also continue
may contract and to work closely
spread serious communicable with the US Centre
diseases. for Disease Control
and Prevention
(the CDC). CDC
experts travel
Impact to Georgia to work
Failure to diagnose closely with the
and/or adhere to Chief Medical Officer,
standards and protocols Chief Epidemiologist
for infectious and and experienced
communicable diseases
could result in: practitioners responsible
* escalation of the epidemic or outbreak; for overseeing
infection and communicable
disease control
* decreased patient trust in our services; and prevention
at our facilities.
* staff contracting contagious diseases resulting in Infection and communicable
staffing shortages; disease control
and prevention
is a standing agenda
* an inability to attract new patient; item each time
the Clinical Quality
and Safety Committee
* claims for damages; meets (at least
quarterly) to review
the Group's clinical
* operational limitations imposed by our regulators; services and performance,
and/or internal governance
and controls as
well as compliance.
* damage to our reputation.
Members of the
Committee and wider
Board also perform
on-site visits
at least quarterly
to review practices
and to discuss
quality and safety
with key practitioners.
----------------------------------------------------------------------- ----------------------------- --------------------------------
Concentration of
Revenue
----------------------------------------------------------------------- ----------------------------- --------------------------------
Our healthcare services Our ability to Changes to the
business depends obtain favourable UHC introduced
on revenue from prices will depend in 2017 resulted
the Georgian Government in part on our in slight decrease
and a small number ability to maintain in the number of
of private insurance good working relationships programme beneficiaries.
providers. with private insurance Nevertheless, the
providers and UHC remains a significant
Payments by the may be impacted priority for the
Government under by any changes Government. Government
UHC may be delayed, to state-funded expenditure on
whilst the private healthcare programmes. healthcare in 2017
insurance companies is budgeted at
we work with may GEL 974 million,
experience financial which represents
difficulties and 9% of the approved
fail, or fail to state budget for
pay the claims we 2017.
submit to them for
healthcare services The Group monitors
provided to patients the macroeconomic
covered by their environment in
services. Georgia and budgetary
performance of
Impact the state to assess
Reduction of prices the forecasted
or increased time future cash flows
taken to pay, including from the State.
delayed payment
under the UHC, would The Group has diversified
affect the revenues, its portfolio by
receivables outstanding the addition of
and profitability pharmaceutical,
of the Group. retail and wholesale
business lines.
The Group actively
seeks to increase
its share in the
outpatient and
planned medical
services markets
and thus reduce
its dependence
on the state insurance
programme.
----------------------------------------------------------------------- ----------------------------- --------------------------------
Currency and Macroeconomic
----------------------------------------------------------------------- ----------------------------- --------------------------------
The Group is exposed In 2016, the Lari The Group actively
to foreign currency depreciated in monitors market
risk, as a significant value by 10.5% conditions, our
proportion of the and 6.8% against currency positions
medical equipment the Dollar and and performs stress
and pharmaceuticals Euro, respectively. and scenario tests
we purchase is denominated In contrast, in in order to assess
in Dollars and/or the first half our financial position
Euro but our revenues of 2017, the Lari and adjust strategy
are in Lari. appreciated in accordingly.
value by 9.1%
A portion of our and 1.8% against Foreign currency
borrowings, particularly the Dollar and exposure is actively
from Development Euro, respectively. hedged by foreign
Financial Institutions, currency forward
is foreign currency-denominated. As the Group's contracts as well
operations continue as regular operational
The Group also faces expand, the demand decisions.
macroeconomic risk. for medical equipment
and pharmaceuticals We adjust our prices
There could be developments will increase, to reflect the
which have an adverse which in turn fluctuations in
effect on the country, will likely lead foreign currency
regional or macro to an increase exchange rates
economy such as in foreign currency to reduce their
reduced GDP or significant denominated expenses. impact. The Group
inflation. takes into account
Real GDP growth the volatility
Impact in Georgia increased of the Lari in
Depreciation of to 4.5% in the pricing discussions
the Lari against first half of with counterparties.
Dollars and/ or 2017 from modest
Euros and/or negative 2.7% growth in In the first half
macroeconomic developments 2016 and 2.9% of 2017, the Group
may have an adverse in 2015, according limited its foreign
effect on our business to Geostat. Georgia's currency exposure
including putting economy has remained by drawing down
adverse pressure resilient despite most of its remaining
on our business low world commodity loan facilities
model, our revenues, prices, which from Development
financial position have affected Financial Institutions
and cash flows. the economy negatively in Lari instead
since the end of Dollars. The
of 2014 through Group remains focused
reduced exports on increasing local
and remittances. currency borrowings
Inflation remains and successfully
contained. placed GEL-denominated
bonds worth GEL
90 million in July.
Regular meetings
of the Supervisory
Board Audit Committee
and the Management
Board further analyse
instability risks
and form responsive
strategies and
action plans.
----------------------------------------------------------------------- ----------------------------- --------------------------------
Information Technology
and Operational
----------------------------------------------------------------------- ----------------------------- --------------------------------
We face information We hold confidential The Group's Information
technology and operational data about our Security Team within
risk. patients and customers the IT Department
given the nature tackles IT and
A cyberattack, security of our healthcare security threats
breach or unauthorised services and must for its healthcare
access to our systems be vigilant to and insurance businesses.
could cause important guard data privacy. The IT Infrastructure
or confidential team handles hardware
data to be misappropriated, Cyber-security projects and matters
misused, disseminated threats are increasing for the healthcare
or lost. year after year. and insurance businesses.
In addition, improper The Group has We are planning
access or information expanded and has to consolidate
misappropriation increasingly complex the Group's efforts
may lead to insider operations to for information
trading or other manage. The recently technology risk
illegal actions acquired pharmaceutical and bring the integrated
by employees or business has a process closer
others. separate IT department together with common
In the event the which covers the standards and procedures.
Group experiences information, cyber
an information technology security and hardware Internal Audit
failure, important separately. conducts regular
and confidential reviews of IT controls
information may such as the policies
be lost. Software for information
or network disruption storage, availability
may cause the Group and access, while
to experience lost updating its assessment
revenue, failed of risks and recommendations.
customer transactions Internal Audit
or non-timely submission reports to the
of extract or mandatory Audit Committee
reports. on its findings.
Non-recurring operational The Group has recently
risks include incurring integrated a new
loss or unexpected core operating
expenses from system system Vabaco into
failure, human error, its healthcare
fraud or other unexpected business, such
events. system having already
been integrated
Impact with the Group's
Any of the above core ERP, Exact,
could lead to disruption thus decreasing
to our business risks arising from
and operations, human error and
affect patient and protecting the
customer loyalty, integrated data
subject us to state better. Vabaco
and Governmental is fully integrated
investigation, litigation, with all external
damages, penalties payment channels.
and/or reputational As a result of
damage. this, nearly all
of the healthcare
services business
runs on one unified
platform with substantially
increased functionality,
capacity and speed.
The Group continues
to design and implement
new business processes
and risk management
structures to better
manage the business
and to help mitigate
our operational
risks.
----------------------------------------------------------------------- ----------------------------- --------------------------------
Regional Tensions
----------------------------------------------------------------------- ----------------------------- --------------------------------
Russia imposed
The Georgian economy economic sanctions The Group actively
and our business on Georgia in monitors significant
may be adversely 2006, and conflict developments in
affected by regional between the countries the region and
tensions. escalated in 2008 risks related to
Georgia shares borders when Russian forces political instability
with Russia, Azerbaijan, crossed Georgian and develops responsive
Armenia and Turkey borders and recognised strategies and
and has two breakaway the independence actions plans.
territories, Abkhazia of Abkhazia and
and the Tskhinvali the Tskhinvali One of the most
Region/South Ossetia. Region/South Ossetia significant changes
Countries within regions. Russian in the Georgian
the region, including troops continue export market was
Azerbaijan, Armenia, to occupy the a shift away from
Russia and Turkey regions and tensions the Russian market
are key trading between Russia after Russia's
partners of Georgia. and Georgia persist. 2006 embargo. Despite
Russia is opposed tensions in the
There has been ongoing to the eastward breakaway territories,
geopolitical tension, enlargement of Russia has continued
political instability, NATO, potentially to open its export
economic instability including former market to Georgian
and military conflict Soviet republics exports since 2013.
in the region, which such as Georgia. While lower global
may have an adverse The introduction commodity prices
effect on our business of a preferential and macroeconomic
and financial position. trade regime between factors have affected
Georgia and the Georgia's regional
Impact EU in July 2016 trading partners,
The ongoing, prolongation and the European leading to lower
or escalation of Parliament's approval exports within
political instability, of a proposal the region, Georgia
geopolitical conflict, on visa liberalisation has benefited from
economic decline for Georgia in increased exports
of Georgia's trading February 2017 earnings from non-traditional
partners and any may intensify markets such as
future deterioration tensions between Switzerland, China,
of Georgia's relationship the countries. Egypt, Saudi Arabia,
with Russia, including The Government South Korea and
in relation to border has taken certain Singapore.
and territorial steps towards In April 2017,
disputes, may have improving relations the IMF approved
a negative with Russia, but, a new three-year
effect on the political as of the date US$285 million
or economic of this Announcement, economic programme,
stability of Georgia, these have not aimed at preserving
which in turn may resulted in any macroeconomic and
have an adverse formal or legal financial stability
effect on our business changes in the and addressing
including putting relationship between structural weaknesses
adverse pressure the two countries. in the Georgian
on our business The crisis in economy to support
model, our revenues Ukraine began higher and inclusive
and our financial in late 2013 and growth.
position. is still ongoing, During first half
directly and adversely of 2017, Georgia
affecting the delivered real
economies of both GDP growth of 4.5%,
Ukraine and Russia. whilst inflation
Sanctions by the was well contained
United States at 7.1% at the
against Russia end of first half
continue and there 2017. Foreign direct
is uncertainty investment continued
as to how and to be solid and
when the conflict tourist arrivals,
between Russia a significant
and Ukraine will
be resolved. driver of Dollar
inflows for the
In late 2015, country, continued
relations between to increase. Tax
Russia and Turkey revenues increased
deteriorated after 14.2% y-o-y and
an airspace dispute were above the
close to the Syria-Turkey budgeted figure
border, after for the first half
which Russia imposed of 2017. The Georgian
strict sanctions Government's fiscal
on Turkey. In position continues
2016, the relationship to be strong.
between the two
countries began
to improve, with
Russia partially
lifting the economic
sanctions it had
imposed. Tension
between the countries
renewed following
the use of chemical
weapons in Syria.
Russia repealed
other sanctions
on Turkey in March
2017, although
certain sanctions
and legal limitations
on Turkish nationals
remain. Relations
between the countries
remain uncertain.
In April 2017,
amendments to
the Turkish constitution
were approved
by voters by referendum.
The amendments
which grant the
president wider
powers are expected
to transform Turkey's
system of government
away from a parliamentary
system. The implementation
of the proposed
amendments could
have a negative
impact on political
stability in Turkey,
which is already
tense after a
failed coup against
the president
in July 2016.
Conflict remains
unabated between
Azerbaijan and
Armenia.
----------------------------------------------------------------------- ----------------------------- --------------------------------
Responsibility Statements
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 gives 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 and Transparency Rule 4.2.7R (indication of important events during the first six months 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 and Transparency Rule 4.2.8R (disclosure of related parties' transactions and changes therein).
After making enquiries, the Directors considered it appropriate to adopt the going concern basis in preparing this Results Report
By order of the board
Irakli Gilauri Nikoloz Gamkrelidze Chairman Chief Executive
14 August 2017
Consolidated Financial Statements
CONTENTS
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. Business Combinations
--... 5. Segment Information
--... 6. Cash and Cash Equivalents
--... 7. Amounts Due from Credit Institutions
--... 8. Insurance Premiums Receivables
--... 9. Receivables from Healthcare Services
--... 10. Property and Equipment
--... 11. Goodwill and Other Intangible Assets
--... 12. Taxation
--... 13. Inventory
--... 14. Prepayments
--... 15. Other Assets
--... 16. Insurance Contract Liabilities
--... 17. Borrowings
--... 18. Accounts Payable
--... 19. Payables for Share Acquisitions
--... 20. Finance Lease Liabilities
--... 21. Other Liabilities
--... 22. Commitments and Contingencies
--... 23. Equity
--... 24. Revenue from healthcare services and medical trials
--... 25. Revenue from pharma
--... 26. Net Insurance Premiums Earned
--... 27. Cost of Healthcare Services and medical trials
--... 28. Cost of sales of pharmaceuticals
--... 29. Cost of insurance services and agents' commissions
--... 30. Other Operating Income
--... 31. Salaries and Other Employee Benefits
--... 32. General and Administrative Expenses
--... 33. Other operating Expenses
--... 34. Interest Income and Interest Expense
--... 35. Net Non-Recurring Expense
--... 36. Net gains/(losses) from foreign currencies and cost of currency derivatives
--... 37. Share-based Compensation
--... 38. Capital Management
--... 39. Maturity analysis
--... 40. Related Party Transactions
--... 41. Fair Value Measurements
--... 42. Events After The Reporting Period
INDEPENT 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 2017, 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 33 to 71. 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 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 Ireland) 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 2017 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London
14 August 2017
Notes:
1. The maintenance and integrity of the Georgia Healthcare Group PLC website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Interim Condensed CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 30 JUNE 2017 (unaudited)
(Thousands of Georgian Lari unless otherwise stated)
Notes Unaudited
------
30-Jun-17 31-Dec-16
------ ---------- ------------
Assets
Cash and cash equivalents 6 17,372 23,239
Amounts due from credit institutions 7 19,680 23,876
Insurance premiums receivable 8 26,936 24,207
Receivables from healthcare services 9 96,784 81,927
Receivables from sales of pharmaceuticals 15,550 5,105
Investment in associate 2,581 2,370
Inventory 13 107,169 54,920
Prepayments 14 25,350 30,518
Property and equipment 10 612,159 574,972
Goodwill and other intangible assets 11 124,490 70,339
Current income tax assets 2,373 2,511
Deferred income tax assets 12 - 309
Other assets 15 15,083 18,270
Total assets 1,065,527 912,563
========== ============
Liabilities
Accounts payable 18 87,691 64,367
Accruals for employee compensation 21,146 16,001
Payables for share acquisitions 19 89,913 8,407
Insurance contract liabilities 16 26,429 26,787
Borrowings 17 280,483 187,557
Debt securities issued - 36,024
Finance lease liabilities 20 2,933 14,878
Current income tax liabilities 274 258
Other liabilities 21 22,010 16,252
---------- ------------
Total liabilities 530,879 370,531
---------- ------------
Equity 23
Share capital 4,784 4,784
Additional paid-in capital 1,345 (200)
Treasury shares (134) (134)
Other reserves (24,588) 4,822
Retained earnings 490,084 476,616
Total equity attributable to shareholders of the Company 471,491 485,888
Non-controlling interests 63,157 56,144
Total equity 534,648 542,032
---------- ----------
Total equity and liabilities 1,065,527 912,563
========== ==========
The interim condensed consolidated financial statements on pages 33 to 71 were approved by the Board of Directors of Georgia Healthcare Group PLC on 14 August 2017 and signed on its behalf by:
Nikoloz Gamkrelidze Chief Executive Officer
14 August 2017
Irakli Gogia Deputy Chief Executive Officer, Finance
14 August 2017
Company registration number: 09752452
The accompanying notes on pages 37 to 71 form an integral part of these interim condensed consolidated financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the period ended 30 JUNE 2017 (unaudited)
(Thousands of Georgian Lari unless otherwise stated)
Notes Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016,
as reclassified
------ ----------- -----------------
Revenue from healthcare services
and medical trials 24 126,156 113,350
Revenue from pharma 25 216,577 30,691
Net insurance premiums earned 26 27,032 29,074
----------- -----------------
Revenue 369,765 173,115
Cost of healthcare services
and medical trials 27 (70,425) (61,700)
Cost of sales of pharmaceuticals 28 (169,230) (25,059)
Cost of insurance services
and agents' commissions 29 (20,338) (24,787)
----------- -----------------
Costs of services (259,993) (111,546)
----------- -----------------
Gross profit 109,772 61,569
----------- -----------------
Other operating income 30 10,186 2,097
Salaries and other employee
benefits 31 (36,152) (16,152)
General and administrative
expenses 32 (24,752) (9,268)
Impairment of healthcare services,
insurance premiums and other
receivables (2,124) (2,216)
Other operating expenses 33 (5,775) (2,019)
----------- -----------------
(68,803) (29,655)
EBITDA 51,155 34,011
----------- -----------------
10,
Depreciation and amortization 11 (12,353) (9,046)
Interest income 34 1,223 693
Interest expense 34 (13,857) (5,818)
Net gains/(losses) from foreign
currencies and cost of currency
derivatives* 36 1,451 (2,224)
Net non-recurring expense 35 (3,270) (816)
Profit before income tax
expense 24,349 16,800
Income tax (expense)/benefit 12 (107) 3,290
Non-recurring income tax
benefit 12 - 25,135
Profit for the period 24,242 45,225
=========== =================
Profit for the period attributable
to:
- shareholders of the Company 15,004 37,676
- non-controlling interests 9,238 7,549
Earnings per share (Profit
for the period):
- basic earnings per share 23 0.12 0.29
- diluted earnings per share 23 0.12 0.29
The accompanying notes on pages 37 to 71 form an integral part of these interim condensed consolidated financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE PERIODED 30 JUNE
(Thousands of Georgian Lari unless otherwise stated)
Attributable to the shareholders
of the Group
Share Treasury Additional Other Retained Total Non-controlling Total
capital shares paid-in reserves earnings interest equity
capital
----------------- ---------- --------- ----------- ---------- --------- --------- ---------------- ----------
1 January
2016 47,842 (1,272) 332,180 (15,289) 55,520 418,981 56,000 474,981
----------
Profit
for the
period - - - - 37,676 37,676 7,549 45,225
Total
comprehensive
income - - - - 37,676 37,676 7,549 45,225
---------- --------- ----------- ---------- --------- --------- ---------------- ----------
Non-controlling
interests
arising
from business
combinations - - - - - - (1,025) (1,025)
Acquisition
of additional
interest
in existing
subsidiaries - - - 468 - 468 (11,119) (10,651)
Capital
reduction (43,058) 1,145 (329,660) (1) 370,895 (679) - (679)
Transaction
costs
recognised
directly
in equity - - (2,520) - - (2,520) - (2,520)
Share-based
compensation - - 1,897 - - 1,897 - 1,897
---------- --------- ----------- ---------- --------- --------- ---------------- ----------
30 June
2016
(unaudited)
(Note 22) 4,784 (127) 1,897 (14,822) 464,091 455,823 51,405 507,228
========== ========= =========== ========== ========= ========= ================ ==========
Attributable to the shareholders
of the Group
Share Treasury Additional Other Retained Total Non-controlling Total
capital shares paid-in reserves earnings interest equity
capital
----------------- -------- --------- ----------- ---------- --------- ------------- ---------------- --------------
31 December
2016 4,784 (134) (200) 4,822 476,616 485,888 56,144 542,032
Effect
from early
adoption
of IFRS
15 - - - - (1,049) (1,049) - (1,049)
--------- ----------- ---------- --------- ------------- ---------------- ------------
1 January
2017 4,784 (134) (200) 4,822 475,567 484,839 56,144 540,983
-------- --------- ----------- ---------- --------- ------------- ---------------- ------------
Profit
for the
period - - - - 15,004 15,004 9,238 24,242
-------- --------- ----------- ---------- --------- ------------- ---------------- ------------
Total
comprehensive
income - - - - 15,004 15,004 9,238 24,242
-------- --------- ----------- ---------- --------- ------------- ---------------- ------------
Non-controlling
interests
arising
from business
combinations - - - - (487) (487) 24,818 24,331
Acquisition
of additional
interest
in existing
subsidiaries - - - (29,410) - (29,410) (29,171) (58,581)
Share-based
compensation - - 1,545 - - 1,545 - 1,545
Investment
by NCI - - - - - - 2,128 2,128
-------- --------- ----------- ---------- --------- ------------- ---------------- ------------
30 June
2017
(unaudited)
(Note 22) 4,784 (134) 1,345 (24,588) 490,084 471,491 63,157 534,648
======== ========= =========== ========== ========= ============= ================ ============
The accompanying notes on pages 37 to 71 form an integral part of these interim condensed consolidated financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHASH FLOW
FOR THE PERIODED 30 JUNE 2017
(Thousands of Georgian Lari unless otherwise stated)
Notes Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
------ ----------- -----------
Cash flows from operating
activities
Revenue from healthcare services
and medical trials received 108,619 101,541
Cost of healthcare services
and medical trials paid (69,509) (62,478)
Revenue from pharma received 219,897 32,466
Cost of sales of pharmaceuticals
paid (178,853) (29,234)
Net insurance premiums received 25,068 26,949
Cost of insurance services
paid (17,447) (21,366)
Salaries and other employee
benefits paid (38,069) (17,098)
General and administrative
expenses paid (24,915) (13,178)
Other operating income received 1,948 1,792
Other operating expenses
paid (1,875) (1,236)
----------- -----------
Net cash flows from operating
activities before income
tax 24,864 18,158
Income tax paid (229) (1,405)
----------- -----------
Net cash flows from operating
activities 24,635 16,753
----------- -----------
Cash flows used in investing
activities
Acquisition of subsidiaries,
net of cash acquired (33,201) (47,288)
Acquisition of additional
interest in existing subsidiaries - (2,472)
Acquisition of investment
securities held-to-maturity - (2,011)
Purchase of property and
equipment (38,905) (53,929)
Purchase of intangible assets (5,248) (1,835)
Interest income received 207 42
Proceeds from amounts due 3,305 -
from credit institutions
Placements of amounts due
from credit institutions (4,105) (5,011)
Proceeds from sale of property
and equipment 105 1,567
----------- -----------
Net cash flow used in investing
activities (77,842) (110,937)
----------- -----------
Cash flows from / (used in)
financing activities
Repurchase of debt securities
issued (34,197) (1,350)
Proceeds from borrowings 128,399 30,662
Repayment of borrowings (36,631) (55,296)
IPO related transaction costs - (2,520)
Interest expense paid (9,769) (8,796)
----------- -----------
Net cash flows (used in)/from
financing activities 47,802 (37,300)
----------- -----------
Effect of exchange rates
changes on cash and cash
equivalents (461) (2,457)
----------- -----------
Net decrease in cash and
cash equivalents (5,866) (133,941)
Cash and cash equivalents,
beginning 6 23,239 145,153
----------- -----------
Cash and cash equivalents,
end 6 17,372 11,212
=========== ===========
The accompanying notes on pages 37 to 71 form an integral part of these interim condensed consolidated financial statements.
1. Background
In 2014 the JSC Insurance Company Aldagi ("Aldagi") and its subsidiaries ("Aldagi group") began a corporate reorganisation in order to separate the healthcare services and medical insurance business, from the property and casualty insurance business.
As at 1 August 2014, Aldagi's medical insurance business segment was separated and transferred to a newly established legal entity, JSC Insurance Company Imedi L ("Imedi L"). At the same time, healthcare providers included in the Aldagi group were transferred to a newly established holding company, JSC Medical Corporation EVEX ("EVEX").
Both Imedi L and EVEX have been ultimately owned by Bank of Georgia Holdings plc ("BGH") since the commencement of reorganisation, but did not represent a group of entities until 27 August 2015, when BGH established a holding company, Georgia Healthcare Group PLC ("GHG" or "the Group"), and transferred its shares in Imedi L and EVEX to GHG. BGH changed its name to BGEO Group PLC ("BGEO") in 2015.
As at 30 June 2017 and 31 December 2016, the ultimate parent of GHG is BGEO Group PLC ("BGEO"), incorporated in London, England. GHG's results are consolidated as part of BGEO's financial statements.
The Group's healthcare services business provides 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 pharma subsidiary, which was acquired in May 2016 (Note 4), offers a wide range of drugs as well as parapharmacy products.
The legal address of GHG PLC is No. 84 Brook Street, London W1K 5EH, United Kingdom. Company registration number is 09752452.
As at 30 June 2017 and 31 December 2016, 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 31-Dec-16
30-Jun-2017
------------------------------- ------------- ----------
BGEO Group PLC 57% 65%
Wellington Management Company 7% 7%
T Rowe LTD 6% 5%
Others 30% 23%
------------- ----------
Total 100% 100%
============= ==========
1. Background (continued)
The Group included the following subsidiaries and associates incorporated in Georgia:
Ownership/Voting
--------------------------
Subsidiary 30-Jun-2017 31-Dec-2016 Industry Date of Date of Legal address
incorporation acquisition
------------------------- ------------ ------------ ----------- -------------- -------------- ----------------
JSC Georgia Healthcare 100% 100% Healthcare 29-Apr-15 Not Vazha-Pshavela
Group Applicable Ave. 40,
Tbilisi,
Georgia
Sanapiro str.
6, Tbilisi,
JSC GEPHA 67% 100% Healthcare 19-Oct-95 4-May-16 Georgia
JSC Insurance Company 100% 100% Insurance 1-Aug-14 31-Jul-14 Anna
Imedi L Politkovskaia
str. 9,
Tbilisi,
Georgia
JSC Medical 100% 100% Healthcare 1-Aug-14 1-Aug-14 Vazha-Pshavela
Corporation EVEX Ave. 40,
Tbilisi,
Georgia
Chavchavadze
ave. 16,
Tbilisi,
GNCo 50% 50% Healthcare 4-Jun-01 5-Aug-15 Georgia
LLC
Nefrology
Development Tsinandali str.
Clinic 9, Tbilisi,
Centre 40% 40% Healthcare 28-Sep-10 5-Aug-15 Georgia
High
Technology
Medical
Centre, Tsinandali str.
University 9, Tbilisi,
Clinic 50% 50% Healthcare 16-Apr-99 5-Aug-15 Georgia
Kavtaradze str.
23, Tbilisi,
LLC Deka 95% 95% Healthcare 12-Jan-12 30-Jun-15 Georgia
LLC 100% 100% Healthcare 13-Feb-15 Not Vazha-Pshavela
Evex-Logistics Applicable Ave. 40,
Tbilisi,
Georgia
LLC Paediatrical
Institute,
Centre of Lubliana str.
Allergy and 13, Tbilisi,
Rheumatology 100% 100% Healthcare 6-Mar-00 19-Feb-14 Georgia
LLC Referral 100% 100% Healthcare 29-Dec-14 Not Vazha-Pshavela
Centre of Applicable Ave. 40,
Pathology Tbilisi,
Georgia
Paolo Iashvili
str. 9,
JSC St. Nicholas Kutaisi,
Surgery Clinic 93% 93% Healthcare 10-Nov-00 20-May-08 Georgia
JSC Kutaisi 67% 67% Healthcare 5-May-03 29-Nov-11 Djavakhishvili
County Treatment str. 85,
and Diagnostic Kutaisi,
Centre for Georgia, 4600
Mothers and
Children
LLC Academician 67% 67% Healthcare 15-Oct-04 29-Nov-11 A
Z. Tskhakaia Djavakhishvili
National Centre str. 83A,
of Intervention Kutaisi,
Medicine of Georgia
Western Georgia
LLC Tskaltubo Eristavi str.
Regional 16, Tskhaltubo,
Hospital 67% 67% Healthcare 29-Sep-99 29-Nov-11 Georgia
LLC Unimedi 100% 100% Healthcare 29-Jun-10 30-Apr-12 Vazha-Pshavela
Achara Ave. 40,
Tbilisi,
Georgia
LLC Unimedi 100% 100% Healthcare 29-Jun-10 30-Apr-12 Vazha-Pshavela
Samtskhe Ave. 40,
Tbilisi,
Georgia
LLC Unimedi 100% 100% Healthcare 29-Jun-10 30-Apr-12 Vazha-Pshavela
Kakheti Ave. 40,
Tbilisi,
Georgia
NPO EVEX 100% 100% Other 20-Dec-13 20-Dec-13 Javakhishvili
Learning Centre str. 83a,
Tbilisi,
Georgia
LLC M. Iashvili
Children Lubliana Str.
Central 2/6, Tbilisi,
Hospital 100% 100% Healthcare 3-May-11 19-Feb-14 Georgia
LLC Catastrophe U. Chkeidze
Medicine str. 10,
Paediatric Tbilisi,
Centre 100% 100% Healthcare 18-Jun-13 1-Mar-15 Georgia
LLC Emergency - - Healthcare 28-Jul-09 20-May-16 D. Uznadze str.
Service* 2, Tbilisi,
Georgia
JSC Poti Central 100% - Healthcare 29-Oct-02 1-Jan-16 Guria str. 171,
Clinical Poti, Georgia
Hospital
JSC Patgeo 100% 100% Healthcare 13-Jan-10 1-Aug-16 Mukhiani, II
mcr. District,
Building 22,
1a, Tbilisi,
Georgia
U. Chkeidze
str. 10,
Tbilisi,
JSC Pediatry 76% 76% Healthcare 5-Sep-03 6-Jul-16 Georgia
NPO Healthcare 33% 33% Healthcare 25-Mar-16 Not Vazha-Pshavela
Association Applicable Ave. 27b,
Tbilisi,
Georgia
JSC Mega-Lab 100% 100% Healthcare 6-Jun-17 Not Petre
Applicable Kavtaradze str.
23, Tbilisi
Georgia
Ownership/Voting
--------------------------
Associate 30-Jun-2017 31-Dec-2016 Industry Date of Date of Legal address
incorporation acquisition
------------------------- ------------ ------------ ----------- -------------- -------------- ----------------
Tsinandali str.
9, Tbilisi,
LLC Geolab 25% 25% Healthcare 3-May-11 5-Aug-15 Georgia
LLC 5th Clinical 35% 35% Healthcare 16-Sep-99 4-May-16 Temka, XI mcr.
Hospital Block 1, N
1/47, Tbilisi,
Georgia
* The Group has de-facto control over the subsidiary (Note 4)
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 2016 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 2017 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.
The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the Group's annual consolidated financial statements as at and for the year ended 31 December 2016, signed and authorised for release on 13 April 2017.
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
The 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.
Reclassifications
During 2017, the Group reconsidered the presentation of its consolidated statement of comprehensive income for the purpose of more accurate presentation of certain accounts stated in the table below. The presentation of comparative figures has been adjusted to confirm to the presentation of the current period amounts:
Consolidated statement As previously Reclassification As reclassified of comprehensive income reported ---------------------------- -------------- ----------------- ---------------- General and Administrative Expenses 9,960 (692) 9,268 Other operating expense 1,327 692 2,019 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 2016, except for the adoption of new standards effective as at 1 January 2017 and early adoption of IFRS 15. The nature and the effect of these changes are disclosed below.
Although these new standards and amendments apply for the first time in 2017, they do not have a material impact on the annual consolidated financial statements of the Group or the interim condensed consolidated financial statements of the Group. The nature and the impact of each new standard or amendment are described below.
Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative
The amendments require entities to provide disclosures about changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). On initial application of the amendment, entities are not required to provide comparative information for preceding periods. The Group is not required to provide additional disclosures in its interim condensed consolidated financial statements, but will disclose additional information in its annual consolidated financial statements for the year ended 31 December 2017. The Group evaluated the impact and concluded that the amendment has no effect on the Group's statement of cash flows.
Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrecognised Losses
The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. Entities are required to apply the amendments retrospectively. However, on initial application of the amendments, the change in the opening equity of the earliest comparative period may be recognised in opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. Entities applying this relief must disclose that fact. Application of the standard has no effect on the Group's financial position and performance as the Group has no deductible temporary differences or assets that are in the scope of the amendments.
Annual Improvements Cycle - 2014-2016
Amendments to IFRS 12 Disclosure of Interests in Other Entities: Clarification of the scope of disclosure requirements in IFRS 12
The amendments clarify that the disclosure requirements in IFRS 12, other than those in paragraphs B10-B16, apply to an entity's interest in a subsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) that is classified (or included in a disposal group that is classified) as held for sale. These amendments are not expected to have any impact to the Group as the Group does not have any interest in a subsidiary, a joint venture or an associate that is classified as held for sale.
Early adoption of IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.
The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early adoption is permitted. The Group early adopted the new standard starting 1 January 2017 using the modified retrospective application method.
In applying IFRS 15, the Group considered the following:
(a) Revenue from sales of pharmaceuticals and Revenue from healthcare services
The accounting for pharma contracts with wholesale customers in which drugs sale is the only performance obligation did not change as a result of IFRS 15. Revenue recognition occurs at a point in time when control of the asset is transferred to the customer, generally on delivery of the goods.
3. Summary of Significant Accounting Policies (continued)
(i) Variable consideration
Invoices sent to state and insurance companies are subject to follow up from counterparties that have a predetermined period to correct invoices in case of any substantive or technical errors. In prior periods the Group recognised the effect of corrections and rebates when it received corrected invoices. IFRS 15 requires the estimated variable consideration to be constrained to prevent over-recognition of revenue. Due to the provisions of IFRS 15, invoice corrections fall under the definition of variable consideration under IFRS 15, and are required to be estimated at contract inception. Due to the fact that corrected invoices are sometimes received with a three months lag, estimation is necessary. The impact of early adoption on consolidated retained earnings as at 1 January 2017 was GEL 1,049, with corresponding decrease of receivables from healthcare services.
(ii) Warranty obligations
Due to the nature of its business activities, the Group does not provide any warranties to clients.
(iii) Loyalty points programme (Zgarbi)
The Group determines that the loyalty programme offered within the pharma business gives rise to a separate performance obligation because it provides a material right to the customer. Thus, it will need to allocate a portion of the transaction price to the loyalty programme based on the relative stand-alone selling price. The Group concluded that the current accounting treatment applied to the customer loyalty programme is substantially in line with IFRS 15 requirements.
(b) Rendering of services
The Group provides healthcare services to clients. The Group has assessed that the services are satisfied over time given that the customer simultaneously receives and consumes the benefits provided by the Group. Consequently, the Group did not have any impact from these service contracts as a result of early adoption of IFRS 15.
(c) Equipment received from customers
When an entity receives, or expects to receive, non-cash consideration, IFRS 15 requires that the fair value of the non-cash consideration is included in the transaction price. An entity would have to measure the fair value of the non-cash consideration in accordance with IFRS 13 Fair Value Measurement. The Group's pharma business sometimes receives drugs in exchange for sale of drugs from other wholesalers (so called "netting"). The consideration received is assessed with reference to its actual wholesale price. This is consistent with the requirements of IFRS 15 and therefore the Group did not have any impact in this area.
No other new or revised IFRS during the six months ended 30 June 2017 had an impact on the Group's financial position or performance.
4. Business Combinations
Acquisitions in period ended 30 June 2017 (unaudited)
JSC ABC Pharmacy
On 6 January 2017, JSC GEPHA ("Acquirer"), a wholly owned subsidiary of the Group acquired 67% of JSC ABC Pharmacy ("ABC"), a pharmaceutical company operating in Georgia from individual investors. The fair values of identifiable assets and liabilities of ABC as at the date of acquisition were:
Fair value
recognised
on acquisition
Assets
Cash and cash equivalents 4,184
Receivables from sales
of pharmaceuticals(1) 8,050
Inventory(1) 44,572
Property and equipment,
net 10,987
Intangible assets, net 322
Current income tax assets 270
Prepayments 1,413
Other assets 1,045
Total assets 70,843
----------------
Liabilities
Accounts payable 27,525
Accruals for employee
compensation 1,861
Other liabilities 1,122
Total liabilities 30,508
----------------
Total identifiable net
assets 40,335
Non-controlling interest 13,312
Goodwill arising on
acquisition 46,796
----------------
Consideration(2) 73,819
================
1. The fair value of the receivables from healthcare services amounted to GEL 8,050. The gross amount of receivables is GEL 9,452. GEL 1,402 of the receivables have been impaired. The fair value of the inventory amounted to GEL 44,572. The gross amount of inventory was GEL 48,176. GEL 3,604 of the inventory have been impaired.
2. Consideration comprised GEL 73,819, of which GEL 10,347 is 33% share of JSC GPC, GEL32,501 has been already paid and remaining amount is due in tranches within 5 years.
Net cash outflow for the acquisition was as follows:
Cash paid 32,501
Cash acquired with the
subsidiary (4,184)
---------
Net cash outflow 28,317
=========
The Group decided to increase its presence and investment in the pharmaceuticals segment through the acquisition of ABC. Management considers that the deal will have a positive impact on the value of the Group.
Since acquisition, ABC has recorded GEL 139,812 and GEL 15,354 of revenue and profit respectively.
The primary factor that contributed to the cost of business combination that resulted in the recognition of goodwill on acquisition is the positive synergy that is expected to be brought into the Group's operations.
4. Business Combinations (continued)
Acquisitions in period ended 31 December 2016
JSC GPC
On 4 May 2016, JSC GHG ("Acquirer"), a wholly owned subsidiary of the Group, acquired 100% of the shares of JSC GPC ("GPC"), a pharmaceuticals company operating in Georgia from individual investors.
The fair values of identifiable assets and liabilities of the GPC as at the date of acquisition were:
Fair value
recognised
on acquisition
Assets
Cash and cash equivalents 1,455
Receivables from sales
of pharmaceuticals(1) 6,461
Inventory 30,329
Investment in associate 2,116
Property and equipment 8,105
Intangible assets 861
Current income tax assets 352
Deferred income tax
assets 200
Prepayments 2,264
Other assets 2,593
----------------
Total assets 54,736
----------------
Liabilities
Borrowings 15,198
Accounts payable 31,523
Accruals for employee
compensation 1,555
Other liabilities 4,714
Total liabilities 52,990
----------------
Total identifiable net
assets 1,746
Non-controlling interests -
Goodwill arising on
acquisition 30,959
----------------
Consideration(2) 32,705
================
1. The fair value of the receivables from sales of pharmaceuticals amounted to GEL 6,461. The gross amount of receivables is GEL 10,884. GEL 4,423 of the receivables have been impaired.
2. Consideration comprised GEL 32,705, which consists of cash payment of GEL 26,686 and a holdback amount with a fair value of GEL 6,019.
Net cash outflow for the acquisition was as follows:
Cash paid 26,686
Cash acquired with the
subsidiary (1,455)
--------
Net cash outflow 25,231
========
The Group decided to increase its presence and investment in the healthcare market by entering the pharmaceuticals segment through the acquisition of GPC. Management considers that the deal will have a positive impact on the value of the Group.
Since acquisition, GPC has recorded GEL 133,002 and GEL 1,924 of revenue and profit respectively in 2016. For the year ended 31 December 2016 revenue and profit of the acquired entity were GEL 199,916 and GEL 1,705 respectively.
If the combination had taken place at the beginning of the year, the Group would have recorded GEL 490,667 and GEL 61,112 of revenue and profit respectively in the year ended 31 December 2016.
The primary factor that contributed to the cost of business combination that resulted in the recognition of goodwill on acquisition is the positive synergy that is expected to be brought into the Group's operations.
4. Business Combination (continued)
Acquisitions in year ended 31 December 2016 (continued)
LLC Emergency Service
On 20 May 2016, JSC Medical Corporation EVEX ("Acquirer"), a wholly owned subsidiary of the Group, obtained de-facto control on LLC Emergency Service ("ES"), a healthcare company operating in Georgia from individual investors.
The fair values of identifiable assets and liabilities of the ES as at the date of acquisition were:
Fair value
recognised
on acquisition
Assets
Cash and cash equivalents 6
Receivables from healthcare
services(1) 418
Inventory 1
Property and equipment 637
Total assets 1,062
----------------
Liabilities
Borrowings 137
Accounts payable 344
Accruals for employee
compensation 199
Total liabilities 680
----------------
Total identifiable net
assets 382
Non-controlling interests 382
Goodwill arising on
acquisition 2,850
----------------
Consideration(2) 2,850
================
1. The fair value of the receivables from healthcare services amounted to GEL 418. The gross amount of receivables is GEL 555. GEL 137 of the receivables has been impaired.
2. Consideration comprised GEL 2,850, of which GEL 500 has been already paid and remaining amount is due within 3 years.
Net cash outflow for the acquisition was as follows:
Cash paid 500
Cash acquired with the
subsidiary (6)
-----
Net cash outflow 494
=====
The Group decided to increase its presence and investment in the Tbilisi healthcare market by acquiring ES. Management considers that the deal will have a positive impact on the value of the Group.
Since acquisition, ES has recorded GEL 2,588 and GEL 481 of revenue and profit respectively. For the year ended 31 December 2016 revenue and profit of the acquired entity were GEL 4,077 and GEL 654 respectively.
If the combination had taken place at the beginning of the year, the Group would have recorded GEL 425,242 and GEL 61,504 of revenue and profit respectively in the year ended 31 December 2016.
The primary factor that contributed to the cost of business combination that resulted in the recognition of goodwill on acquisition is the positive synergy that is expected to be brought into the Group's operations.
4. Business Combination (continued)
Acquisitions in year ended 31 December 2016 (continued)
JSC Pediatry
On 6 July 2016, JSC Medical Corporation EVEX ("Acquirer"), a wholly owned subsidiary of the Group acquired 76% of JSC Pediatry ("Pediatry") shares from individual investors and signed a contract, which mandates purchase of remaining 24% shares. Pediatry is a healthcare company operating in Georgia. The fair values of identifiable assets and liabilities of Pediatry as at the date of acquisition were:
Fair value
recognised
on acquisition
Assets
Cash and cash equivalents 14
Receivables from healthcare
services1 303
Inventory 4
Property and equipment 402
Intangible assets 15
Total assets 738
----------------
Liabilities
Accounts payable 62
Accruals for employee
compensation 101
Current income tax liabilities 67
Other liabilities 24
Total liabilities 254
----------------
Total identifiable net
assets 484
Non-controlling interests -
Goodwill arising on
acquisition 963
----------------
Consideration(2) 1,447
================
1. The fair value of the receivables from healthcare services amounted to GEL 303. The gross amount of receivables is GEL 541. GEL 238 of the receivables has been impaired.
2. Consideration comprised GEL 1,447, which consists of cash payment of GEL 1,100 and a holdback amount with a fair value of GEL 347.
Net cash outflow for the acquisition was as follows:
Cash paid 1,100
Cash acquired with the
subsidiary (14)
------
Net cash outflow 1,086
======
The Group decided to increase its presence and investment in the regional healthcare market by acquiring Pediatry. Management considers that the deal will have a positive impact on the value of the Group.
Since acquisition, Pediatry has recorded GEL 886 and GEL 121 of revenue and profit respectively. For the year ended 31 December 2016 revenue and profit of the acquired entity were GEL 1,764 and GEL 237 respectively.
If the combination had taken place at the beginning of the year, the Group would have recorded GEL 424,631 and GEL 61,447 of revenue and profit respectively in the year ended 31 December 2016.
The primary factor that contributed to the cost of business combination that resulted in the recognition of goodwill on acquisition is the positive synergy that is expected to be brought into the Group's operations.
4. Business Combination (continued)
Acquisitions in year ended 31 December 2016 (continued)
LTD Patgeo
On 1 August 2016, JSC Medical Corporation EVEX ("Acquirer"), a wholly owned subsidiary of the Group acquired 100% of LTD Patgeo ("Patgeo"), a healthcare company operating in Georgia from individual investors. The fair values of identifiable assets and liabilities of Patgeo as at the date of acquisition were:
Fair value
recognised
on acquisition
Assets
Cash and cash equivalents 43
Receivables from healthcare
services(1) 119
Inventory 36
Property and equipment 28
Other assets 2
Total assets 228
----------------
Liabilities
Accounts payable 33
Accruals for employee
compensation 30
Current income tax liabilities 25
Other liabilities 34
Total liabilities 122
----------------
Total identifiable net
assets 106
Non-controlling interests -
Goodwill arising on
acquisition 1,450
----------------
Consideration(2) 1,556
================
1. The fair value of the receivables from healthcare services amounted to GEL 119. The gross amount of receivables is GEL 263. GEL 144 of the receivables has been impaired.
2. Consideration comprised GEL 1,556, which consists of cash payment of GEL 800 and a holdback amount with a fair value of GEL 756.
Net cash outflow for the acquisition was as follows:
Cash paid 800
Cash acquired with the
subsidiary (43)
-----
Net cash outflow 757
=====
The Group decided to increase its presence and investment in the regional healthcare market by acquiring Patgeo. Management considers that the deal will have a positive impact on the value of the Group.
Since acquisition, Patgeo has recorded GEL 718 and GEL 114 of revenue and profit respectively. For the year ended 31 December 2016 revenue and profit of the acquired entity were GEL 1,716 and GEL 262 respectively.
If the combination had taken place at the beginning of the year, the Group would have recorded GEL 424,751 and GEL 61,479 of revenue and profit respectively in the year ended 31 December 2016.
The primary factor that contributed to the cost of business combination that resulted in the recognition of goodwill on acquisition is the positive synergy that is expected to be brought into the Group's operations.
5. Segment Information
For management purposes, the Group is organised into three operating segments based on the products and services - Healthcare services, Pharma and Medical insurance. All revenues of the Group result from Georgia.
Healthcare services are the inpatient and outpatient medical services delivered by the referral hospitals, community hospitals and ambulatory clinics owned by the Group throughout the whole Georgian territory.
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 Group's wholly owned subsidiary Imedi L.
Pharma comprises a wide range of drugs and parapharmacy products which are offered through a chain of well-developed drug-stores by the Group'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.
Transactions between operating segments are on an arm's length basis as with transactions with third parties.
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 2017 or 30 June 2016.
5. Segment Information (continued)
Statement of comprehensive income and selected items from the statement of financial position as at 30 June 2017 by segments are presented below:
Unaudited
Period ended 30 June 2017
-----------------------------------------------------------------------
Healthcare Pharma Medical Intersegment Total
Services Insurance transactions
and consolidation
----------- ----------- ----------- ------------------- -----------
Revenue from healthcare
services and medical
trials 131,665 - - (5,509) 126,156
Revenue from pharma - 222,341 - (5,764) 216,577
Net insurance premiums
earned - - 27,375 (343) 27,032
Revenue 131,665 222,341 27,375 (11,616) 369,765
----------- ----------- ----------- ------------------- -----------
Cost of healthcare
services and medical
trials (75,429) - - 5,004 (70,425)
Cost of sales of pharmaceuticals - (169,230) - - (169,230)
Cost of insurance
services and agents'
commissions - - (25,452) 5,114 (20,338)
Costs of services (75,429) (169,230) (25,452) 10,118 (259,993)
----------- ----------- ----------- ------------------- -----------
Gross profit 56,236 53,111 1,923 (1,498) 109,772
----------- ----------- ----------- ------------------- -----------
Other operating income 9,742 418 40 (14) 10,186
Salaries and other
employee benefits (15,175) (19,300) (2,020) 343 (36,152)
General and administrative
expenses (8,236) (15,991) (873) 348 (24,752)
Impairment of healthcare
services, insurance
premiums and other
receivables (2,013) (131) (230) 250 (2,124)
Other operating expenses (5,440) (500) (65) 230 (5,775)
(30,864) (35,922) (3,188) 1,171 (68,803)
----------- ----------- ----------- ------------------- -----------
EBITDA 35,114 17,607 (1,225) (341) 51,155
----------- ----------- ----------- ------------------- -----------
Depreciation and amortisation (10,713) (1,176) (464) - (12,353)
Interest income 833 145 245 - 1,223
Interest expense (7,071) (6,125) (661) - (13,857)
Net (losses)/gains
from foreign currencies (500) 1,915 36 - 1,451
Net non-recurring
income/(expense) (2,531) (882) (198) 341 (3,270)
----------- ----------- ----------- ------------------- -----------
Profit before income
tax expense 15,132 11,484 (2,267) - 24,349
Income tax benefit
(expense)/income (11) 214 (310) - (107)
Profit for the period 15,121 11,698 (2,577) - 24,242
=========== =========== =========== =================== ===========
Assets and liabilities
Total assets 729,650 263,140 56,473 16,264 1,065,527
Total liabilities 364,839 123,459 45,886 (3,305) 530,879
Other segment information
Property and equipment 582,437 23,746 5,976 - 612,159
Intangible assets 16,187 1,639 2,372 - 20,198
5. Segment Information (continued)
Statement of comprehensive income and selected items from the statement of financial position as at 30 June 2016 by segments are presented below:
Unaudited
Period ended 30 June 2016
-------------------------------------------------------------------------------------------
Healthcare Services Pharma Medical Insurance Intersegment Total
transactions and
consolidation
-------------------- ---------- ------------------ ------------------------ -----------
Revenue from healthcare
services and medical
trials 118,096 - - (4,746) 113,350
Revenue from pharma - 30,691 - - 30,691
Net insurance premiums
earned - - 29,128 (54) 29,074
Revenue 118,096 30,691 29,128 (4,800) 173,115
-------------------- ---------- ------------------ ------------------------ -----------
Cost of healthcare
services and medical
trials (64,397) - - 2,697 (61,700)
Cost of sales of
pharmaceuticals - (25,059) - - (25,059)
Cost of insurance
services and agents'
commissions - - (26,836) 2,049 (24,787)
Costs of services (64,397) (25,059) (26,836) 4,746 (111,546)
-------------------- ---------- ------------------ ------------------------ -----------
Gross profit 53,699 5,632 2,292 (54) 61,569
-------------------- ---------- ------------------ ------------------------ -----------
Other operating income 1,871 191 35 - 2,097
Salaries and other
employee benefits (11,369) (2,690) (2,147) 54 (16,152)
General and
administrative expenses (6,000) (2,533) (1,427) - (9,960)
Impairment of healthcare
services, insurance
premiums and other
receivables (1,978) - (238) - (2,216)
Other operating expenses (1,235) (46) (46) - (1,327)
(20,582) (5,269) (3,858) 54 (29,655)
-------------------- ---------- ------------------ ------------------------ -----------
EBITDA 34,988 554 (1,531) - 34,011
-------------------- ---------- ------------------ ------------------------ -----------
Depreciation and
amortisation (8,382) (258) (406) - (9,046)
Interest income 645 - 697 (649) 693
Interest expense (5,903) (427) (137) 649 (5,818)
Net (losses)/gains from
foreign currencies (2,122) (272) 170 - (2,224)
Net non-recurring
income/(expense) 157 - (973) - (816)
Profit before income tax
expense 19,383 (403) (2,180) - 16,800
Income tax benefit
(expense)/income 28,105 - 320 - 28,425
Profit for the period 47,488 (403) (1,860) - 45,225
==================== ========== ================== ======================== ===========
Assets and liabilities
Total assets 675,998 56,334 71,120 10,637 814,089
Total liabilities 216,391 55,225 54,229 (18,984) 306,861
Other segment
information
Property and equipment 488,105 7,950 5,684 - 501,739
Intangible assets 7,412 829 2,629 - 10,870
6. Cash and Cash Equivalents
Cash and cash equivalents comprise:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Current and on-demand accounts
with banks 14,604 22,604
Cash on hand 2,768 635
Total cash and cash equivalents 17,372 23,239
========== ==========
Cash and cash equivalents of Imedi L on a stand-alone basis are GEL 1,038 (2016: GEL 4,362). The requirement of the Insurance State Supervision Service of Georgia ("ISSSG") is to maintain a minimum level of cash and cash equivalents at 10% of the total insurance contract liabilities subject to mandatory reserve requirements as defined by the ISSSG regulatory reserve requirement resolution, which as at the reporting date amounts to GEL 621 (2016: GEL 701). Management does not expect any losses from non-performance by the counterparties holding cash and cash equivalents, and there are no material differences between their book and fair values.
7. Amounts Due from Credit Institutions
Amounts due from credit institutions comprise:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Time deposits with banks, foreign
currency 19,366 22,832
Time deposits with banks, local
currency 314 1,044
Total amounts due from credit
institutions 19,680 23,876
========== ==========
As at 30 June 2017, amounts due from credit institutions are represented by short (remaining maturity from reporting date of 1 to 12 months) placements with banks and earn annual interest of 0% to 8.25% (2016: 1.45% to 8.5%). As at 30 June 2017 amounts due from credit institutions include restricted cash of GEL 13,138 (2016: GEL 2,357), of which GEL 2,143 (2016: GEL 2,357) is pledged under the export facility agreement with ING Bank N.V, GEL 1,313 (2016: GEL 0) is pledged under currency forward contracts and the remaing GEL 9,682 (2016: GEL 0) is pledged under credit facilities.
8. Insurance Premiums Receivables
Insurance premiums receivables comprise:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Insurance premiums receivable
from policyholders 29,242 26,726
Less - Allowance for impairment (2,306) (2,519)
---------- ----------
Total insurance premiums receivables,
net 26,936 24,207
========== ==========
The carrying amounts disclosed above reasonably approximate their fair values as at 30 June 2017 and 31 December 2016.
9. Receivables from Healthcare Services
Receivables from healthcare services comprise:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Receivables from State 80,963 71,343
Receivables from individuals
and other 24,774 20,824
Receivables from insurance companies 4,642 790
110,379 92,957
Less - Allowance for impairment (13,595) (11,030)
Total receivables from healthcare
services, net 96,784 81,927
========== ==========
The carrying amounts disclosed above reasonably approximate their fair values as at 30 June 2017 and 31 December 2016.
The Group's largest receivable is from the State, representing amounts receivable under the Universal Healthcare Programme ("UHC") introduced by the State in March 2013. Through the UHC, the State provides basic healthcare coverage to the entire population, including more than 2 million people who previously lacked any medical insurance and purchased healthcare services only on an out-of-pocket basis. Currently fully operational, the implementation of UHC took place in several stages:
-- March 2013. Urgent in-patient and limited out-patient healthcare was offered free of charge for individuals who were previously not covered by State or private insurance programmes (accounting for approximately 2 million people, including children above the age of six and adults);
-- July 2013. UHC was extended to cover intensive therapy, planned surgeries, treatment of oncology diseases (including radiotherapy, chemotherapy and hormone therapy) as well as childbirth expenses;
-- April 2014. UHC superseded the State Insurance Programme (SIP) - the first of two existing State insurance programmes that had provided healthcare coverage to "economically vulnerable" citizens since 2007;
-- September 2014. UHC superseded the second SIP (under the Decree 165) that covered pensioners, children under 6 and students.
A summary description of UHC is as follows:
-- UHC is fully financed by the Georgian Government and administered by the Social Service Agency. In most cases beneficiaries have an annual limit of 15,000 Lari per incident. This threshold limits the services to which a patient can have access, resulting in the need for co-payment for most critical elective services;
-- UHC beneficiaries are eligible to select a healthcare provider of their choice, as long as it is enrolled in the programme;
-- Any provider, private or public, is eligible to participate in the programme;
-- The actual prices that are charged to patients by healthcare providers are not regulated by the State. However, the reimbursement scheme (i.e. the amount paid by the State to healthcare providers) differs depending on the type of services:
-- The capitation method is used for elective outpatient services;
-- Emergency medical care tariffs are based on the minimum historic prices under the previous State medical insurance programmes, with the possibility of changes over time;
-- For elective in-patient services, the amount reimbursed by the State is based on the average of the lowest 25(th) percentile of the prices charged by countrywide providers, with the patient making a co-payment for any excess charges.
UHC reimbursement scheme for the selected services in Georgia is as follows:
Service Reimbursement from the State ------------------------------------------------------- ---------------------------------------------------------- Scheduled ambulatory service 70% Service of a family doctor and basic laboratory tests 100% Emergency in-patient services 70/100% with a limit for a single accident of 15,000 Lari Scheduled surgeries and associated tests 70%; annual limit -15,000 Lari Treatment of oncology diseases 80%; annual limit -12,000 Lari Childbirth 500 Lari; caesarean section -800 Lari ------------------------------------------------------- ---------------------------------------------------------- 10. Property and Equipment
The movements in property and equipment were as follows:
Land Hospitals Furniture Computers Medical Motor Leasehold Assets Total
and & clinics and equipment vehicles improvements under
office fixtures construction
buildings
---------- ---------- ---------- ---------- ---------- --------- ------------- ------------- ----------
Cost
1 January 2016 3,588 312,490 9,825 8,313 115,636 4,714 7,169 12,477 474,212
Acquisition
through
business
combinations 4,640 13,296 1,088 1,323 1,282 1,019 1,063 - 23,711
Revaluation
(Note 22) - 12,846 - - - - - - 12,846
Additions - 52,444 4,046 3,339 44,803 163 1,316 5,134 111,245
Disposals - (6,276) (188) (500) (298) (917) (149) - (8,328)
Transfers and
corrections(1) (46) 16,859 (1,948) (1,836) (15,884) (635) (137) (16,859) (20,486)
---------- ---------- ---------- ---------- ---------- --------- ------------- ------------- ----------
31 December
2016 8,182 401,659 12,823 10,639 145,539 4,344 9,262 752 593,200
---------- ---------- ---------- ---------- ---------- --------- ------------- ------------- ----------
Acquisition
through
business
combinations
(Note 4) 6,829 - 1,445 996 - 1,129 589 - 10,988
Additions 2,753 9,839 3,074 2,882 17,081 326 890 437 37,282
Disposals - - (73) (126) - (149) (13) - (361)
30 June
2017(Unaudited) 17,764 411,498 17,269 14,391 162,620 5,650 10,728 1,189 641,109
---------- ---------- ---------- ---------- ---------- --------- ------------- ------------- ----------
Accumulated
Depreciation
1 January 2016 153 6,326 2,552 3,019 16,492 719 233 - 29,494
---------- ---------- ---------- ---------- ---------- --------- ------------- ------------- ----------
Depreciation
charge 39 1,965 1,433 1,545 11,307 832 781 - 17,902
Disposals - (297) (155) (141) (237) (29) (8) - (867)
Revaluation - (7,814) - - - - - - (7,814)
Transfers and
corrections - - (1,963) (1,836) (15,884) (635) (169) - (20,487)
---------- ---------- ---------- ---------- ---------- --------- ------------- ------------- ----------
31 December
2016 192 180 1,867 2,587 11,678 887 837 - 18,228
---------- ---------- ---------- ---------- ---------- --------- ------------- ------------- ----------
Depreciation
charge 29 1,622 608 1,340 6,576 369 535 - 11,079
Disposals - - (71) (186) - (99) (1) - (357)
---------- ---------- ---------- ---------- ---------- --------- ------------- ------------- ----------
30 June
2017(Unaudited) 221 1,802 2,404 3,741 18,254 1,157 1,371 - 28,950
---------- ---------- ---------- ---------- ---------- --------- ------------- ------------- ----------
Net book value:
1 January 2016 3,435 306,164 7,273 5,294 99,144 3,995 6,936 12,477 444,718
========== ========== ========== ========== ========== ========= ============= ============= ==========
31 December
2016 7,990 401,479 10,956 8,052 133,861 3,457 8,425 752 574,972
========== ========== ========== ========== ========== ========= ============= ============= ==========
30 June
2017(Unaudited) 17,543 409,696 14,865 10,650 144,366 4,493 9,357 1,189 612,159
========== ========== ========== ========== ========== ========= ============= ============= ==========
(1) Transfers and corrections relate allocation of costs as a result of stock taking in 2016.
10. Property and Equipment (continued)
The Group pledges its office and hospital buildings and assets under construction as collateral for its borrowings. The carrying amount of the buildings pledged as at 30 June 2017 was GEL 399,471 (2016: GEL 410,221). During 2016 the Group changed its accounting policy with respect to the hospitals and clinics. The Group engaged an independent appraiser to determine the fair value of its land and office buildings and hospitals and clinics on 1 July 2016. As a result, the Group posted a revaluation surplus of GEL 20,804 of which GEL 19,645 was attributable to shareholders of the Company and GEL 1,159 was attributable to non-controlling interest. Fair value is determined by reference to market-based evidence. The most recent revaluation report for the Group's buildings was dated 1 July 2016. If the land and office buildings and hospitals and clinics were measured using the cost model, the carrying amounts of the buildings as at 30 June 2017 and 31 December 2016 would be as follows:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Cost 416,972 397,062
Accumulated depreciation and
impairment (9,714) (8,245)
Net carrying amount 407,258 388,817
========== ==========
11. Goodwill and Other Intangible Assets
The movements in goodwill were as follows:
Goodwill
---------
31 December 2015 20,713
=========
Acquisition through business combinations 33,149
Change in GNCo Goodwill 853
=========
31 December 2016 54,715
Acquisition through business combinations
(Note 4) 46,796
Change in provisional value of goodwill
of GPC 1,933
---------
Change in provisional value of goodwill
of Patgeo 756
Change in provisional value of goodwill
of Emergency Service 383
Change in provisional value of goodwill
of HTMC (291)
---------
30 June 2017(Unaudited) 104,292
=========
Other intangible assets comprise of licenses and computer software with carrying value as at 30 June 2017 of GEL 20,198 (2016: GEL 15,624). As at 30 June 2017 the cost of other intangible assets equalled GEL 23,416 (2016: GEL 17,607) and accumulated amortisation and impairment equalled GEL 3,218 (2016: GEL 1,983). The Group performed impairment tests and identified impairment of intangible assets of GEL 606 as at 30 June 2017, which was charged to profit or loss.
The table below presents carrying values of goodwill by subsidiary companies.
Effective WACC applied Unaudited
annual growth for impairment
rate in
three-year
financial
budgets
--------------- ----------------
30 June 31 December
2017 2016
--------------- ---------------- ---------- ------------
JSC Insurance
Company Aldagi 10.00% 13.00% 3,260 3,260
JSC My Family
Clinic 10.00% 13.00% 508 508
JSC Insurance
Company Partner 10.00% 13.00% 103 103
JSC Insurance
Company Imedi
L International 10.00% 13.00% 99 99
Caraps Medline 10.00% 13.00% 3,534 3,534
Traumatology 10.00% 13.00% 911 911
GNCo 10.00% 13.00% 11,991 12,282
LLC Catastrophe
Medicine Paediatric
Centre 10.00% 13.00% 869 869
JSC GPC 10.00% 13.00% 30,958 29,025
LLC Emergency
Service 10.00% 13.00% 2,850 2,467
JSC Pediatry 10.00% 13.00% 963 963
LTD Patgeo 10.00% 13.00% 1,450 694
JSC ABC Pharmacy 10.00% 13.00% 46,796 -
Total 104,292 54,715
========== ============
11. Goodwill and Other Intangible Assets (continued)
In performing goodwill impairment testing the following key assumptions were made:
-- WACC was used as a discount rate for the forecasted cash flows. WACC was estimated using a capital asset pricing model based on the group's shares market beta.
-- 2018, 2019 and 2020 years' cash flow projections were modelled applying 10% growth.
-- Moderate, stable 4% real GPD growth was assumed based on the external statistical forecasts for 2021 and beyond.
Management believes that reasonably possible changes in key assumptions used to determine the recoverable amount of CGUs will not result in an impairment of goodwill. The Group performs goodwill impairment testing annually. The latest impairment test performed by the Group was as at 30 June 2017. In 2017 the reporting segments were considered as CGUs for the purposes of goodwill impairment testing. The Group did not identify any impairment of goodwill as at 30 June 2017. The recoverable amounts of the cash-generating units have been determined based on value-in-use calculations using cash flow projections based on financial budgets approved by senior management covering from a three-year period, historical price-to-tangible book value multiple and price earnings ratio multiple.
12. Taxation
The corporate income tax expense comprises:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Current tax benefit 202 828
Deferred tax (expense)/ benefit
- origination and reversal of
temporary differences (309) 27,597
Income tax (expense)/ benefit (107) 28,425
=========== ===========
Georgian legal entities must file individual tax declarations. The statutory corporate tax rate was zero rate on retained earnings and 15% tax rate on distributed earnings in the period ended 30 June 2017 and 15% in the period ended 30 June 2016.
In May 2016, the parliament of Georgia signed a document approving a change in the current corporate taxation model which is applicable starting from 1 January 2017 for all entities apart from financial institutions, including insurance business and is applicable starting from 1 January 2019 to financial institutions, including our medical insurance subsidiary - Imedi L. The new model implies zero rate on retained earnings and 15% tax rate on distributed earnings. The Group considered the new regime as substantively enacted effective June 2016 and thus re-measured its deferred tax assets and liabilities. The change had an immediate impact on deferred tax asset and deferred tax liability balances. The whole amount of deferred tax assets and liabilities was written off.
The effective income tax rate differs from the statutory income tax rates. Reconciliation of the income tax expense based on statutory rates with actual is as follows:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
IFRS income before tax 24,349 16,800
Statutory tax rate 15% 15%
----------- -----------
Theoretical income tax expense
at the statutory rate 3,652 2,520
Georgian tax code change effect 309 (25,135)
Correction of prior year declaration (202) -
Recovery of deferred tax assets - (4,176)
Non-taxable income (3,652) (1,857)
Non-deductible expenses - 223
Income tax expense/(benefit) 107 (28,425)
=========== ===========
12. Taxation (continued)
Deferred tax assets and liabilities as at 30 June 2016 and their movements for the period then ended comprise:
1-Jan-16 In Acquired 31-Dec-16 In Acquired 30-Jun-17
the through the through
income business income business
statement combination statement combination
---------- ---------- ------------ ---------- ----------- ------------ ----------
Tax effect of
deductible
temporary
differences
Tax loss carried
forward 4,147 (4,147) - - - - -
Insurance
premiums
receivables 1,120 (607) - 513 (513) - -
Receivable from
healthcare
services 1,530 (1,530) - - - - -
Receivable from
sale of
pharmaceuticals - (214) 214 - - - -
Accruals for
employee
compensation 1,854 (2,054) 200 - - - -
Borrowings 23 64 - 87 (87) - -
Accounts payable - (63) 63 - - - -
Other assets 314 (251) - 63 (63) - -
---------- ---------- ------------ ---------- ----------- ------------ ----------
Deferred tax
assets 8,988 (8,802) 477 663 (663) - -
---------- ---------- ------------ ---------- ----------- ------------ ----------
Tax effect of
taxable
temporary
differences:
Property and
equipment 26,974 (28,860) 1,915 29 (29) - -
Investment in
associate - (289) 289 - - - -
Debt securities
issued 117 (117) - - - - -
Insurance
contract
liabilities 43 (78) - (35) 35 - -
Intangible
assets 355 5 - 360 (360) - -
Other
liabilities 9 533 (542) - - - -
---------- ---------- ------------ ---------- ----------- ------------ ----------
Deferred tax
liabilities 27,498 (28,806) 1,662 354 (354)
---------- ---------- ------------ ---------- ----------- ------------ ----------
Net deferred tax
(liability)
asset (18,510) 20,004 (1,185) 309 (309)
========== ========== ============ ========== =========== ============ ==========
Deferred income
tax assets 796 (964) 477 309 (309) - -
========== ========== ============ ========== =========== ============ ==========
Deferred income
tax liabilities (19,306) 20,968 (1,662) - - - -
========== ========== ============ ========== =========== ============ ==========
12. Taxation (continued)
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Georgia currently has a number of laws related to various taxes imposed by State governmental authorities. Applicable taxes include value added tax, corporate income tax (profits tax), and a turnover based tax, amongst others. Laws related to these taxes have not been in force for significant periods in contrast to more developed market economies. Therefore, regulations are often unclear or non-existent and few precedents have been established. This creates tax risks in Georgia that are substantially more significant than typically found in countries with more developed tax systems.
Management believes that the Group is in substantial compliance with the tax laws affecting its operations. However, the risk remains that relevant authorities could take differing positions with regard to interpretive issues. The Group's operations and financial position will continue to be affected by Georgian political developments, including the application and interpretation of existing and future legislation and tax regulations. Such possible occurrences and their effect on the Group could have a material impact on the Group's operations or its financial position in Georgia.
13. Inventory
The caption includes GEL 92,167 inventory held by pharma business (JSC GEPHA), increase year over year is mainly caused by the acquisition of ABC (note 4). Our pharma business uses specific identification method for inventory accounting.
14. Prepayments
Prepayments comprise:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Prepayments for property and
equipment and intangible assets 7,097 24,914
Prepayments for operating expenses 18,253 5,604
---------- ----------
Total prepayments 25,350 30,518
========== ==========
The prepayments mainly comprise advances to the constuctors of Deka and Sunstone hospitals.
15. Other Assets
Other assets comprise:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Call option 4,691 -
Non-medical receivables 3,201 5,599
Loans issued 2,221 2,963
Lease deposit 1,637 1,853
Deferred acquisition costs 1,467 1,341
Prepaid operating taxes 749 237
Derivative financial assets - 6,277
Other 4,318 3,201
Total other assets, gross 18,284 21,471
Less - allowance for impairment (3,201) (3,201)
---------- ----------
Total other assets, net 15,083 18,270
========== ==========
As part of the ABC acquisition contract aquirer (JSC GEPHA) has a call option to buy the remaining non-controlling interest, which is a 33% stake in the combined pharma business during the period from 1 january 2023 to 31 December 2023. In accordance with IFRS requirments the Group recognized a GEL 4,691 asset.
15. Other Assets (continued)
Loans issued as at 30 June 2017 mainly comprise debt securities issued by JSC m2 Real Estate and LLC Georgian Leasing Company that are owned by the Group. Both companies represent related party entities of the Group. As at 30 June 2017, lease deposit comprises advances paid to a lease contractor on the rent of an ambulatory clinic. Lease payments are netted against the deposited amount upon payment due date.
16. Insurance Contract Liabilities
Insurance contract liabilities comprise:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Insurance contracts liabilities
- Unearned premiums reserve ("UPR") 23,889 22,372
- Reserves for claims reported
but not settled ("RBNS") 2,201 2,625
- Reserves for claims incurred
but not reported ("IBNR") 339 1,790
Total insurance contracts liabilities 26,429 26,787
========== ==========
Movements in the insurance contract liabilities during the period can be analysed as follows:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
At the beginning of the period 26,787 21,351
Premiums written during the period 30,012 65,491
Premiums earned during the period (27,032) (61,104)
Claims incurred during the period 18,634 45,544
Claims paid during the period (21,972) (44,495)
At the end of the period 26,429 26,787
========== ==========
17. Borrowings
Borrowings comprise:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Borrowings from local financial
institutions 113,610 79,417
Borrowings from foreign financial
institutions 159,057 99,541
Borrowings from shareholders 6,037 5,756
Overdrafts from local commercial
banks 1,779 2,843
Total borrowings 280,483 187,557
========== ==========
In the period ended 30 June 2017 borrowings from local financial institutions had an average interest rate of 11.61% per annum (2016: 10.66%), maturing on average in 1,191 days (2016: 1,299 days). Borrowings from international financial institutions had an average interest rate of 9.04% (2016: 6.31%), maturing in 2,318 days (2016: 2,213 days). Some borrowings are received upon certain conditions, such as maintaining different limits for leverage, capital investments, minimum amount of immovable property and others. At 30 June 2017 and 31 December 2016 the Group complied with all these lender covenants. As at 30 June 2017, the Group had undrawn loan commitment of USD 5.5 million from Procredit Bank and Bank of Georgia. As at 31 December 2016 the Group had undrawn loan commitment of USD 25 million from International Finance Corporation and undrawn loan commitment of USD 4 million from Proparco.
18. Accounts Payable
Accounts payable comprise:
Unaudited
30-Jun-2017 31-Dec-16
------------- ----------
Accounts payable for materials
and supplies 68,294 39,424
Accounts payable for property
and equipment 8,313 9,744
Accounts payable for office supplies 6,573 7,646
Accounts payable for healthcare
services 3,374 3,902
Other accounts payable 1,137 3,651
Total accounts payable 87,691 64,367
============= ==========
19. Payables for Share Acquisitions
Payables for share acquisitions (also referred to as a "holdback" or an "acquisition holdback") are stated at fair value and represent outstanding amounts payable for business combinations and acquisition of non-controlling interest in existing subsidiaries.
Payables for business combination is a portion of the total consideration, payment of which is deferred for a specified period of time in the future and, usually, is contingent upon certain events or conditions precedent or covenants established by the buyer. These conditions are: (i) The audited total equity balance in accordance with IFRS should not be materially different compared to management accounts existing as at the date of deal; (ii) Material unrecorded liabilities should not be identified; (iii) Any liabilities of the acquiree and/or its related parties towards the acquirer should not remain unpaid for greater than predetermined period after acquisition. Once these conditions precedent are fulfilled, the holdback amount is then paid fully or adjusted, as prescribed in the share purchase agreement for each particular business combination.
As at 30 June 2017, payable for share acquisitions comprised a holdback for the acquisition of ABC of GEL 85,960, for acquisition of LLC Emergency Service of GEL 2,850, for JSC Pediatry of GEL 347 and for acquisition of LLC Patgeo of GEL 756.
As at 31 December 2016, payable for share acquisitions comprised a holdback for the acquisition of JSC GPC of GEL 5,210, a holdback for acquisition of LLC Emergency Service of GEL 2,850 and a holdback for acquisition of JSC Pediatry of GEL 347.
From JSC ABC holdback of GEL 85,960, GEL 58,096 represents redemption liability arising from put option held by minority shareholders of JSC GEPHA which can be exercised in 2022 in case of which the Group will have to acquire from non-controlling interests the remaining 33% share based on pre-determined EBITDA multiple (4.5 times EBITDA). The Redemption liability is measured at amortized cost using initial effective interest rate on US Dollar denominated borrowings.
20. Finance Lease Liabilities
Finance lease liabilities comprise the minimum lease payments and the repurchase option price, exercisable in up to a one year, of an ambulatory clinic located in Tbilisi. As at 30 June 2017, the net carrying value of the property held under finance leases equalled GEL 3,591. The undiscounted value of the future minimum lease payments and the repurchase options equalled GEL 3,082 while the present value of these amounts equalled GEL 2,933. The difference of GEL 149 between the two values fully comprised a discount applying a 6% implicit rate. At the option expiration, the embedded purchase option in the finance lease agreements is renewed automatically unless the counterparty comes up with a new repurchase price within several days from the option expiration. All payments under finance lease contracts are due in no later than one year.
21. Other Liabilities
Other liabilities comprise:
Unaudited
30-Jun-2017 31-Dec-16
------------- ----------
Operating taxes payable 6,113 5,648
Deferred revenues 3,607 4,427
Provisions for ongoing litigation 2,646 2,141
Insurance claims payable 3,138 2,283
Derivative financial liabilities 2,068 -
Commissions payable 1,467 1,341
Other 2,971 412
------------- ----------
Total other liabilities 22,010 16,252
============= ==========
Provisions for ongoing litigation mainly result from acquired companies GEL 2,359 (2016:GEL 2,141). The provisions were created on acquisition and were taken into account in the process of determining the consideration for the business combinations. There have been no changes in provisions for ongoing litigation the since acquisition dates. Another portion of litigation reserves was recognised in the period ended 30 June 2017 (GEL 287) and mainly relates to litigation started in the last 6 months.
22. Commitments and Contingencies
Legal
In the ordinary course of business, the Group and the Company are subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Group or the Company.
Taxation
Georgian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant tax authorities. Recent events within Georgia suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. As such, significant additional taxes, penalties and interest may be assessed. It is not practical to determine the amount of unasserted claims that may manifest, if any, or the likelihood of any unfavourable outcome. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the period of review. Under certain circumstances reviews may cover longer periods.
Management believes that its interpretation of the relevant legislation is appropriate and that it is probable that the Group's tax, currency and customs positions will be sustained.
Financial commitments and contingencies
The Group's financial commitments and contingencies comprise the following:
Unaudited
30-Jun-17 31-Dec-16
---------- ----------
Capital commitments 8,598 12,914
Lease commitments
- Leases expiring not later than
1 year 19,401 14,200
- Leases expiring later than
1 year but not later than 5 years 62,714 61,824
Total financial commitments and
contingencies 90,713 88,938
========== ==========
In the six months ended 30 June 2017 as well as in the year ended 31 December 2016, capital commitments comprisedcontracts related to the construction of ambulatory clinics in Georgia. The commitments fully result from subsidiaries. The Company does not have any commitments or contingencies. The Group did not have contingent rents or sublease payments. The Company does not have any lease commitments. The amount of operating lease expense recognised is disclosed in Note 31.
22. Commitments and Contingences (continued)
As at 30 June 2017, the Group had litigation with the Social Service Agency ("SSA") in relation to an aggregate amount of GEL 8,187 (2016: GEL 3,765) and litigation with its associate company Geolab in relation to an amount of GEL 2,024 (2016: 0). The litigation with SSA was mainly related to procedural violations in medical documentation as well as the billing and invoicing process, while the litigation with Geolab related to the provision of laboratory services by Geolab which were invoiced with procedural violations and therefore not paid by the Group. The Group's legal department identified the related risks as possible but not probable.
23. Equity
As part of the ABC acquisition contract, the selling shareholders have a put option to sell their remaining 33% stake in the combined pharma business to GHG during the period from 1 January 2023 to 31 December 2023. At initial recognition, in accordance with IFRS requirements, the Group recognised GEL 55 million (present value) liability to purchase the remaining 33% shares - included in the payable for share acquisitions caption. The non-controlling interest arising from the consolidated pharma business, GEL 22 million, was fully de-recognised in accordance with IFRS requirements. The difference between the redemption liability of GEL 55 million and the non-controlling interest GEL 24 million was debited to equity, resulting in a reduction of equity through other reserves by GEL 31 million. The redemption liability is carried at amortized cost and interest is unwound on each reporting date. The difference between the unwound interest and the share of profit attributable to the non-controlling interest is debited or credited to other reserves (to "Acquisition of additional interest in existing subsidiaries" line).
The impact of early adoption of IFRS 15, GEL 1,049 was debited to Retained Earnings in accordance with the modified retrospective application method.
In January 2016, the Group undertook a reduction of capital in order to create distributable reserves for the Company. The difference between the nominal value of the Company's shares (GBP 0.01) and the aggregate carrying value of the Group's Share Capital, Additional paid-in capital and Treasury shares was credited to the merger reserve created in connection with the capital reduction. It was the intention of the Group that the maximum amount of distributable reserves be created. The Group implemented a Court-approved reduction of capital which reduced the original nominal value of GHG shares thereby creating distributable reserves.
In the six month period ended 30 June 2017 and in the year ended 31 December 2016 the following changes occurred in the amount of issued shares:
Number Amount
of ordinary of ordinary
shares shares
------------- -------------
1 January 2016 131,681,820 47,842
Capital reduction - (43,058)
31 December 2016 131,681,820 4,784
============= =============
- -
============= =============
30 June 2017 131,681,820 4,784
============= =============
The number of treasury shares held by the Company as at 30 June 2017 was 3,452,534 (31 December 2016: 3,727,835). The treasury shares are kept by the Company for the purposes of its future employee share-based compensation.
The Share capital of the Company was paid by the shareholders in Georgian Lari and they were entitled to dividends in Georgian Lari before the IPO. After establishment of GHG PLC (Note 1) the Company share capital was denominated in GBP and shareholders were entitled to dividends in GBP. No dividends were announced or distributed in the period ended 30 June 2017 or 2016 year.
In 2016 GEL 20,804 was recognised in other comprehensive income as a revaluation surplus on hospitals and clinics. From the total amount, GEL 19,645 was attributable to shareholders of the Company and GEL 1,159 was attributable to non-controlling interests.
Regulatory capital requirements in Georgia are set by the ISSSG and are applied to Imedi L solely on a stand-alone basis. The ISSSG requirement is to maintain a minimum Capital of GEL 1,500, of which 80% should be kept in current accounts. A bank confirmation letter is submitted to ISSSG on a quarterly basis in order to prove compliance with the above-mentioned regulatory requirement. Imedi L regularly and consistently complies with the ISSSG regulatory capital requirement.
23. Equity (continued)
For the purpose of calculating basic earnings per share the Group used profit for the year attributable to shareholders of the Company of GEL 15,004 (30 June 2016: GEL 37,676) as a numerator and the weighted average number of shares outstanding during the period ended 30 June 2017 of 128,091,636 (30 June 2016: 128,181,820) as a denominator. For diluted earnings per share, the Group used the same numerator as for basic earnings per share and used the weighted average number of shares outstanding together with the number of shares granted to management during the period ended 30 June 2017 of 131,681,820 (2016: 131,681,820) as a denominator.
Nature and purpose of other reserves
Revaluation reserve for property and equipment
The revaluation reserve for property and equipment is used to record increases in the fair value of office buildings and decreases to the extent that such decrease reverses an increase in the fair value of the same asset previously recognised in equity. As at 30 June 2017, revaluation reserve for property and equipment equalled GEL 20,104 (2016: GEL 20,104).
Losses from sale/acquisition of shares in existing subsidiaries
In March 2016, the Group acquired the remaining 33.3% minority shareholding of its largest pediatric hospital, Iashvili Referral Hospital. The Group has held a 66.7% controlling interest in Iashvili since February 2014. In exchange for the 33.3% minority shareholding in Iashvili, GHG paid cash consideration of USD 1.0 million and transferred non-cash consideration - all of its fixed assets in Tbilisi Maternity Hospital "New Life" - to the seller of the minority stake. The resulting gain from the acquisition was GEL 468.
As at 30 June 2017, Losses from sale/acquisition of shares in existing subsidiaries equalled GEL (44,692) (2016: GEL (15,282)).
24. Revenue from healthcare services and medical trials
Revenue from healthcare services and medical trials comprises:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
State 90,641 88,346
Out-of-pocket and other 31,356 23,605
Insurance companies 5,442 2,533
Less: Corrections & rebates (1,283) (1,134)
Revenue from healthcare services
and medical trials 126,156 113,350
=========== ===========
Revenue from the State represents the revenue through UHC. A full description of the programme is provided in Note 9 above.
25. Revenue from pharma
Revenue from pharma comprises:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Retail 164,083 23,066
Wholesale 52,494 7,625
Total revenue from pharma 216,577 30,691
=========== ===========
26. Net Insurance Premiums Earned
Net insurance premiums earned comprise:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Gross premiums written 30,012 41,651
Change in unearned premiums reserve (2,980) (12,577)
Total net insurance premiums
earned 27,032 29,074
=========== ===========
27. Cost of Healthcare Services and medical trials
Cost of healthcare services comprises:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Cost of salaries and other employee
benefits (45,654) (37,950)
Cost materials and supplies (17,761) (18,052)
Cost of utilities and other (6,234) (4,904)
Cost of providers (776) (794)
Total cost of healthcare services
and medical trials (70,425) (61,700)
=========== ===========
Cost of utilities and other comprise electricity, natural gas, cleaning, water supply, fuel supply, repair and maintenance of medical equipment. Indirect salaries that were not included in the cost of healthcare services and medical trials in the period ended 30 June 2017 amounted to GEL 36,152 (period ended 30 June 2016: GEL 16,152) and were presented as a separate line item in profit or loss. The total amount of salaries and other employee benefits recognised as an expense in profit or loss in the period ended 30 June 2017 amounted to GEL 81,806 (period ended 30 June 2016: GEL 54,102).
28. Cost of sales of pharmaceuticals
Cost of sales of pharmaceuticals comprises:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Retail (123,744) (18,514)
Wholesale (45,486) (6,545)
Total cost of sales of pharmaceuticals (169,230) (25,059)
----------- -----------
29. Cost of insurance services and agents' commissions
Cost of insurance services and agents' commissions comprises:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Insurance claims paid (21,972) (23,894)
Change in insurance contract
liabilities 3,338 987
----------- -----------
Net insurance claims incurred (18,634) (22,907)
----------- -----------
Agents, brokers and employee
commissions (1,704) (1,880)
----------- -----------
Cost of insurance services and
agents' commissions (20,338) (24,787)
=========== ===========
30. Other Operating Income
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Gain from call option 4,691 -
Gain from lease derecognition 2702 -
Rent Income 932 612
Gain from rent liability derecognition 514 -
Revenue from sale of drugs 241 612
Income from Associate 211 -
Gain from PPE sold 98 304
Revenue from realized stationery 13 110
Other 784 459
----------- -----------
Total other operating income 10,186 2,097
=========== ===========
As part of the ABC acquisition contract aquirer (JSC GEPHA) has a call option to buy the remaining non-controlling interest, which is a 33% stake in the combined pharma business during the period from 1 January 2023 to 31 December 2023. In accordance with IFRS requirments the Group recognized GEL 4,691 gain from the call option.
The Group recognized a gain from derecognition of one of its finance leases arising from the option price of leased property and the actual acquisition.
31. Salaries and Other Employee Benefits
Salaries and employee benefits comprise:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Salaries and other benefits (33,017) (14,235)
Cash bonuses (2,673) (791)
Share-based compensation (462) (1,126)
Total salaries and other employee
benefits (36,152) (16,152)
=========== ===========
The average number of full time employees, including those whose salaries are included in the cost of healthcare services and medical trials, in the six month period ended 30 June 2017, equaled 13,785 (30 June 2016: 10,797).
32. General and Administrative Expenses
General and administrative expenses comprise:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Operating lease expense (9,747) (2,670)
Marketing and advertising (3,397) (1,225)
Office supplies (1,919) (1,510)
Professional services (1,659) (875)
Administrative utilities (939) (66)
Representative expense (899) (298)
Communication (813) (510)
Travel (535) (341)
Bank fees and commissions (473) (244)
Security (382) (136)
Other (3,989) (1,393)
Total general and administrative
expenses (24,752) (9,268)
=========== ===========
In the six month period ended 30 June 2017 and 30 June 2016 other general and administrative expenses mainly comprised training, property tax, property insurance and other operating tax expenses.
33. Other Operating Expenses
Other operating expenses comprise:
Unaudited
Unaudited Period
Period ended 30
ended 30 June 2016
June 2017 as reclassified
----------- -----------------
Repair and maintenance expense (1,187) (692)
Penalty expense (1,141) -
Impairment of intangible assets (606) -
Impairment expense on PPE (295) -
Loss from litigations (1,092) -
Impairment of prepayments (225) -
Expense on corporate event (168) -
Loss from receivables write-off (141) -
Loss from PPE sold (20) (93)
Other (900) (1,234)
----------- -----------------
Total other operating expense (5,775) (2,019)
=========== =================
In the six month period ended 30 June 2017 penalty expenses mainly related to procedural violations in medical documentation as well as billing and invoicing process.
34. Interest Income and Interest Expense
Interest income and interest expense comprise:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -------------
Interest income
Interest income from amounts
due from credit institutions 909 609
Interest income from loans issued 314 84
Total interest income 1,223 693
=========== =============
Interest expense
Interest expense on borrowings (12,706) (3,927)
Interest expense on debt securities
issued (1,151) (1,891)
----------- -----------
Total interest expense (13,857) (5,818)
=========== ===========
In the six months period ended 30 June 2017 the amount of borrowing costs capitalised in relation to qualifying items of property and equipment amounted to GEL 2,838 (30 June 2016: GEL 846).
35. Net Non-Recurring Expense
Net non-recurring expense for the six month period ended 30 June 2017 comprises:
-- GEL 1,253 loss from one-off write-off of a loan; -- GEL 699 loss from one-off dismissal compensations to employees; -- GEL 687 loss from loan write-off; -- GEL 200 loss on contract, which was trerminated in Februarry 2017; -- GEL 129 loss from capital reduction; -- GEL 302 loss from other individually insignificant transactions;
35. Net Non-Recurring Expense (continued)
Net non-recurring expense for the six month period ended 30 June 2016 comprises:
-- GEL 2,348 gain from disposal of New Life clinic; -- GEL 2,973 loss from one-off write-off of old receivables; -- GEL 1,615 gain from write-off of waived payables;
-- GEL 738 loss on contract terms which are expected to be improved in the second half of the year 2016;
-- GEL 441 loss from one-off compensations to employees;
-- GEL 336 one-off currency conversion loss from settlement of consideration paid for acquisition of JSC GPC.
-- GEL 200 one-off income from penalties to constructors. -- GEL 418 loss from write-off of other assets. -- GEL 73 net loss from other individually insignificant transactions. 36. Net gains/(losses) from foreign currencies and cost of currency derivatives
The caption includes GEL 2,313 cost of currency derivatives (2016: GEL 0).
37. Share-based Compensation
Sanne Fiduciary Services (the "Trustee") acts as the trustee of the Group's Employee Benefit Trust, (EBT), which was founded in 2015. The EBT was established for the purposes of satisfying deferred share compensation awarded to Executive Directors and other members of executive and senior management.
Due to the fact that the Group does not expect payments of any dividends in subsequent years, they were not incorporated into the measurement of fair value of the plans.
GHG Senior Executive Plans
In February 2017 the Board of Directors of GHG resolved to award 141,981 ordinary shares of GHG to the CEO of the Group. In February 2017 the Board of Directors of GHG resolved to award 128,070 ordinary shares of GHG to 3 executives. The shares were awarded with a three-year vesting period, with continuous employment being the only vesting condition for both awards. The Group considers 28 February 2017 as the grant date for the awards to the CEO and other executives. The Group estimates that the fair value of the shares awarded was GEL 11.68 per share as of grant date. The fair values were identified based on market prices on grant date. As at 30 June 2017 no shares have been vested.
In February 2016, the Board of Directors of GHG resolved to award 237,500 ordinary shares of GHG to the CEO of the Group. In February 2016, the Board of Directors of GHG resolved to award 281,000 ordinary shares of GHG to 3 executives. The shares were awarded with a three-year vesting period, with continuous employment being the only vesting condition for both awards. The Group considers 15 February 2016 as the grant date for the awards to the CEO and other executives. The Group estimates that the fair value of the shares awarded was GEL 6.28 per share as of grant date. The fair values were identified based on market prices on grant date. As at 30 June 2017, one third of the discretionary shares have been vested.
In January 2015, the CEO of the Group and the deputies signed five-year fixed contingent share-based compensation agreements for the total of 1,670,000 ordinary shares of GHG. The total amount of shares allocated to each executive will be awarded in five equal instalments during the five consecutive years starting January 2017, of which each award will be subject to a four-year vesting period with 20% of shares vesting during the first three years and 40% of shares vesting during the fourth year. The Group considers 1 January 2015 and 29 April 2015 as the grant dates for the awards to the CEO and deputies respectively. The Group estimates that the fair value of the shares awarded was GEL 2.18 per share as of the respective grant dates. The respective fair values were estimated using appropriate valuation techniques based on market and income approaches. As at 30 June 2017, 4% of the shares have been vested.
37. Share-based Compensation (continued)
BGEO Senior Executive Plans
In March 2015, the Board of Directors of BGEO resolved to award 24,576 ordinary shares of BGEO to 4 executives of the Group. The shares were awarded with a three-year vesting period, with continuous employment being the only vesting condition for the awards. The Group considers 19 March 2015 as the grant date for the awards. The Group estimates that the fair value of the shares awarded on 19 March 2015 was GEL 57.41 per share. The fair value was identified based on market prices on grant date. As at 30 June 2017, two thirds of the discretionary shares have been vested.
38. Capital Management
Capital under management consists of share capital, additional paid-in capital, retained earnings including profit or loss of the current period, revaluation and other reserves and non-controlling interests. The Group has established the following capital management objectives, policies and approach to managing the risks that affect its capital position.
The capital management objectives are as follows:
-- To maintain the required level of stability of the Group thereby providing a degree of security to the shareholders as well as insurance policyholders for the insurance arm;
-- To allocate capital efficiently and support the development of business by ensuring that returns on capital employed meet the requirements of its capital providers and of its shareholders;
-- To maintain financial strength to support new business growth and to satisfy the requirements of the shareholders, regulators as well as insurance policyholders for the insurance arm.
Some operations of the Group are subject to local regulatory requirements within the jurisdiction where it operates, currently Georgia only. Such regulations prescribe approval and monitoring of certain activities. They also impose certain restrictive provisions for the insurance arm, such as insurance capital adequacy and the minimum insurance liquidity requirement, to minimise the risk of default and insolvency and to meet unforeseen liabilities as they arise.
During the six month period ended 30 June 2017 and year ended 31 December 2016 the Group complied with all regulatory requirements as well as insurance capital and insurance liquidity regulations, in full.
The Group's capital management policy for its insurance business is to hold the least required amount of regulatory capital and, also, to hold sufficient liquid assets to cover statutory requirements based on the directives of ISSSG. The regulations of ISSSG require that an insurance company must hold liquid assets of at least 75% of its unearned premium reserve, net of gross insurance premiums receivable, and 100% of its loss reserves. Assets eligible for inclusion in liquid assets are: cash and cash equivalents, amounts due from credit institutions, loans issued, investment property as well as other financial assets, as defined by ISSSG. The amount of such minimum liquid assets is called the "Statutory Reserve".
The Statutory Reserve requirement for Imedi L as at 30 June 2017 equals to the minimum amount of liquid assets of GEL 6,207 (2016: GEL 7,007). The insurance company is fully compliant with the requirement by holding actual GEL 6,354 (2016: GEL 9,693) of total eligible liquid assets.
39. Maturity analysis
The table below analyses assets and liabilities of the Group into their relevant maturity groups based on the remaining period at the reporting date their contractual maturities or expected repayment dates.
30 June 2017 (unaudited) Less than More than Total
-------------------------------- ----------
one year one year
-------------------------------- ---------- ---------- ----------
Assets
Cash and cash equivalents 17,372 - 17,372
Amounts due from credit
institutions 19,680 - 19,680
Insurance premiums receivables 26,936 - 26,936
Receivables from healthcare
services 96,784 - 96,784
Receivables from sales
of pharmaceuticals 15,550 - 15,550
Investment in associate - 2,581 2,581
Inventory 107,169 - 107,169
Prepayments 18,253 7,097 25,350
Property and equipment - 612,159 612,159
Goodwill and other intangible
assets - 124,490 124,490
Current income tax assets 2,373 - 2,373
Other assets 9,772 5,311 15,083
---------- ---------- ----------
Total assets 313,889 751,638 1,065,527
========== ========== ==========
Liabilities
Accruals for employee
compensation 21,146 - 21,146
Accounts payable 87,691 - 87,691
Payable for share acquisitions 31,817 58,096 89,913
Insurance contract liabilities 26,429 - 26,429
Borrowings 59,792 220,691 280,483
Finance lease liabilities 2,933 - 2,933
Current income tax liabilities 274 - 274
Other liabilities 22,010 - 22,010
Total liabilities 252,092 278,787 530,879
Net position 61,797 472,851 534,648
========== ========== ==========
Accumulated gap 61,797 534,648
========== ==========
39. Maturity analysis (continued)
31 December 2016 Less than More than Total
-------------------------------- --------
one year one year
-------------------------------- ---------- ---------- --------
Assets
Cash and cash equivalents 23,239 - 23,239
Amounts due from credit
institutions 23,876 - 23,876
Insurance premiums receivables 24,207 - 24,207
Receivables from healthcare
services 81,927 - 81,927
Receivables from sales
of pharmaceuticals 5,105 - 5,105
Investment in associate - 2,370 2,370
Inventory 54,920 - 54,920
Prepayments 5,604 24,914 30,518
Property and equipment - 574,972 574,972
Goodwill and other intangible
assets - 70,339 70,339
Current income tax assets 2,511 - 2,511
Deferred income tax assets - 309 309
Other assets 18,270 - 18,270
---------- ---------- --------
Total assets 239,659 672,904 912,563
========== ========== ========
Liabilities
Accounts payable 64,367 - 64,367
Accruals for employee
compensation 16,001 - 16,001
Payable for share acquisitions 5,210 3,197 8,407
Insurance contract liabilities 26,787 - 26,787
Borrowings 42,414 145,143 187,557
Debt securities issued 36,024 - 36,024
Finance lease liabilities 14,878 - 14,878
Current income tax liabilities 258 - 258
Other liabilities 16,252 - 16,252
Total liabilities 222,191 148,340 370,531
Net position 17,468 524,564 542,032
========== ========== ========
The amounts and maturities in respect of the insurance contract liabilities are based on management's best estimate based on statistical techniques and past experience. Management believes that the current level of the Group's liquidity is sufficient to meet all its present obligations and settle liabilities in timely manner.
The Group also matches the maturity of financial assets and financial liabilities and imposes a maximum limit on negative gaps.
40. Related Party Transactions
In accordance with IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. All transactions with related parties disclosed below have been conducted on an arm's length basis.
The volumes of related party transactions, outstanding balances at the period/year end, and related expense and income for the period/year are as follows:
40. Related Party Transactions (continued)
Unaudited Period Year ended 31 December
ended 30 June 2017 2016
Entities Other** Entities Other***
under under
-------- ----------
common common
control* control**
------------ -------- ------------- ----------
Assets
Cash and cash
equivalents 4,585 - 14,428 -
Amounts due
from credit
institutions 10,954 - 8,017 -
Insurance premiums
receivable 1,427 - 1,727 -
Other assets:
Non-medical
receivables 323 - 1,010 -
Other assets: - - 6,277 -
Derivative
financial assets
Other assets:
Loans issued
and lease deposit 2,063 1,637 1,999 2,547
Prepayments
and other assets 357 - 17 -
------------ -------- ------------- ----------
19,709 1,637 33475 2,547
============ ======== ============= ==========
Liabilities
Derivative 2,068 - - -
financial liabilities
Borrowings 62,110 - 37,495 -
Insurance contract
liabilities 1,577 - 1,904 -
Accounts payable 428 - 1,949 -
Other liabilities 77 - - -
------------ -------- ------------- ----------
66,260 - 41,348 -
============ ======== ============= ==========
Unaudited Unaudited
Period ended 30 Period ended 30
June 2017 June 2016
-------------------- --------------------
Entities Other** Entities Other**
under under
-------- --------
common common
control* control*
---------- -------- ---------- --------
Income and
expenses
Net insurance
premiums earned 1,766 - 1,475 -
General and
administrative
expenses (712) - (436) -
Interest income 687 - 129 -
Interest expense (5,567) - (2,880) -
Net gains from 4,272 - - -
foreign currencies
Other operating (457) - - -
expenses
Cost of healthcare (476) - - -
services and
medical trials
---------- -------- ---------- --------
(487) - (1,712) -
========== ======== ========== ========
* Entities under common control include BGEO Group PLC subsidiaries
** Other related party comprises of single entity to which the Group provides management services.
Compensation of key management personnel comprised the following:
Unaudited Unaudited
Period Period
ended 30 ended 30
June 2017 June 2016
----------- -----------
Salaries and cash bonuses 2,402 1,559
Share-based compensation 1,383 1,028
Total key management compensation 3,785 2,587
=========== ===========
41. Fair Value Measurements
Fair value hierarchy
For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability. The Group uses the following hierarchy for determining and disclosing the fair value:
-- Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
-- Level 2: techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
-- Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
Fair value hierarchy (continued)
The following tables show the analysis of assets and liabilities measured at fair value or for which fair values are disclosed by level of the fair value hierarchy. It also includes a comparison by class of the carrying amounts and fair values of the Group's financial instruments that are carried in the financial statements. The table does not include the fair values of non-financial assets and non-financial liabilities carried at cost:
(Unaudited) Level 1 Level 2 Level 3 Total fair value 30-Jun-2017 Carrying value 30-Jun-2017 Unrecognised gain (loss)
30-Jun-2017
------------ --- -------- --------- ----------------------------- --------------------------- -------------------------
Assets measured
at fair value
Property and
equipment - - 427,239 427,239 427,239 -
Other assets:
call opition - - 4,691 4,691 4,691 -
Assets for which far values
are disclosed
Cash and cash
equivalents - 17,372 - 17,372 17,372 -
Amounts due from
credit
institutions - - 19,680 19,680 19,680 -
Receivables from
healthcare
services - - 96,784 96,784 96,784 -
Receivables from
sales of
pharmaceuticals - - 15,550 15,550 15,550 -
Other assets:
loans issued and
lease deposit - - 3,858 3,858 3,858 -
Other assets:
non-medical
receivables - - 3,201 3,201 3,201 -
Liabilities for which fair
values are disclosed
Borrowings - - 247,730 247,730 280,483 32,753
The Group only carries land and office buildings at fair value (level 3). Refer to Note 10.
The following is a description of the determination of fair value for financial instruments and property that are recorded at fair value using valuation techniques. These incorporate the Group's estimate of assumptions that a market participant would make when valuing the instruments.
Property and equipment
Property carried at fair value consists of land and buildings and hospitals and clinics, for which fair value is derived by certain inputs that are not based on observable market data. The value of these assets is measured using the market approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable land and buildings respectively.
Derivative financial instruments
Derivative financial instruments valued using a valuation technique with market observable inputs comprise forward foreign exchange contracts. The applied valuation technique employs a discounted forward pricing model. The model incorporates various inputs including the foreign exchange spot and forward rates.
Call option represents option on acquisition of remaining 33% equity interest in JSC GEPHA from non-controlling interests in 2022 based on pre-determined EBITDA multiple (6.0 times EBITDA) of JSC Gepha. The Group has applied binomial model for option valuation. Major unobservable input for call option valuation represents volatility of price of the underlying 33% minority share of equity, which was estimated based on actual volatility of parent company's market capitalisation from January 1, 2013 till 30 June 2017 period, which equalled 37.3%. If the volatility was 10% higher, fair value of call option would increase by GEL 1,219 if volatility was 10% lower call option value would decrease by GEL 1,249. The Group recognised GEL 4,691 unrealised gains on the call option during the period ended 30 June 2017.
41. Fair Value Measurements (continued)
Fair value hierarchy (continued)
Impact of changes in key assumptions on fair value of level 3 assets measured at fair value
Level 3 property at fair value
(unaudited) 30 Valuation Significant Range Other Range Sensitivity of
June technique unobservable key the input
2017 inputs information to fair value
Property
and
equipment
Price Increase (decrease)
per in the price
Land square per square meter
and meter, Square would result
office Market land, meters, in increase (decrease)
buildings 17,543 approach building 5-2,284 building 123-1,770 in fair value
Price Increase (decrease)
per in the price
square per square meter
Hospitals meter, Square would result
and Market land, meters, in increase (decrease)
clinics 409,696 approach building 3-1,106 building 151-30,700 in fair value
The following describes the methodologies and assumptions used to determine fair values for those financial instruments that are not already recorded at fair value in the consolidated financial statements.
Assets for which fair value approximates carrying value
For financial assets and financial liabilities that are liquid or have a short term maturity (less than three months) it is assumed that the carrying amounts approximates their fair value. This assumption is also applied to variable rate financial instruments.
Fixed rate financial instruments
The fair values of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates offered for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on a discounted cash flow analysis using prevailing money-market interest rates for debts with similar credit risk and maturity.
42. Events After The Reporting Period
In July 2017 EVEX issued two-year term local bonds of GEL 90 million. The bonds were issued at par value with an annual coupon rate of 10.5% representing a 350 basis points premium over the National Bank of Georgia Monetary Policy (refinancing) Rate. The proceeds will be used to refinance borrowings from local commercial banks, which are a relatively more expensive source of funding, and also to fund planned ongoing capital expenditures.
In July 2017 the Group signed a Sale and Purchase Agreement (SPA) to acquire a 100% equity stake in Khashuri and Qareli community hospitals from IC Group member companies. IC Group is an insurance company operating in Georgia and owns several small-to-medium sized hospitals.
Annexes:
-- Corrections and rebates are corrections of invoices due to errors or faults by third parties
-- Eliminations are intercompany transactions between medical insurance and healthcare services Gross margin - Gross margin equals gross profit divided by gross revenue excluding corrections and rebates
-- Materials rate equals cost of materials and supplies divided by gross revenue excluding corrections and rebates
-- Direct salary rate equals cost of salaries and other employee benefits divided by gross revenue excluding corrections and rebates
-- Admin salary rate equals administrative Salaries and other employee benefits divided by gross revenue excluding corrections and rebates
-- Selling, general and administrative expenses rate (SG&A rate) equals General and administrative expenses divided by gross revenue excluding corrections and rebates
-- Other operating expenses are operating expenses which are not included in cost of sales and administrative expenses, which primarily include the cost of medicines sold, any losses from the sale of property and equipment, expenses on factoring, write-offs of fixed assets and other
-- Operating leverage is calculated as the difference between percentage increase in gross profit and percentage increase in total operating costs and other operating incomes
-- EBITDA is defined as earnings before interest, taxes, depreciation and amortisation and is derived as the Group's Profit before income tax expense but excluding the following line items: depreciation and amortisation, interest income, interest expense, net losses from foreign currencies and net non-recurring (expense)/income
-- EBITDA margin equals EBITDA divided by gross revenue excluding corrections and rebates
-- The Group's rent expense comprises of operating lease contracts
-- The Group's maintenance capital expenditure are short-term expenditures
-- The Group's expansion capital expenditures are longer term by nature and include acquisition of properties with longer useful lives
-- Net Debt to EBITDA equals Borrowings less Cash and bank deposits divided by EBITDA
-- Earnings per share (EPS) equals profit for the period / net profit attributable to shareholders of the Company divided by weighted average number of shares outstanding during the same period
-- Bed occupancy rate is calculated by dividing the number of total inpatient nights by the number of bed days (number of days multiplied by number of beds, excluding emergency beds) available during the year
-- Average length of stay is calculated as number of inpatient days divided by number of patients. This calculation excludes data for the emergency department
-- Renewal rate is calculated by dividing number of clients who renewed insurance contracts during given period by total number of clients
-- Commission ratio equals agents, brokers and employee commissions divided by net insurance premiums earned
-- Loss ratio is defined as net insurance claims divided by net insurance revenue
-- Expense ratio is defined as operating expenses excluding interest expense divided by net insurance revenue
-- Combined ratio is the sum of loss ratio and expense ratio
-- Day's sales outstanding ratio ("DSO") equals receivables from sales of pharmaceuticals divided by wholesale revenue of pharma business, multiplied by number of days in a given period
-- Revenue cash conversion equals revenue received from all business lines divided by net revenue.
-- EBITDA cash conversion cycle equals Net cash flows from / (used in) operating activities before income tax divided by EBITDA
-- Other operating income is presented on a net basis and is derived from financial statements after subtracting other operating expense
-- Net interest income (expense) and cost of currency derivatives includes interest expense as well as cost of currency derivatives as presented in the financial statements
COMPANY INFORMATION
Georgia Healthcare Group PLC
Registered Address
84 Brook Street
London W1K 5EH
United Kingdom
ghg.com.ge
Registered under number 09752452 in England and Wales
Incorporation date: 27 August 2015
Stock Listing
London Stock Exchange PLC's Main Market for listed securities
Ticker: "GHG.LN"
Contact Information
Georgia Healthcare Group PLC Investor Relations
Telephone: +44 (0) 20 3178 4033; +995 322 444 205
E-mail: ir@ghg.com.ge
ghg.com.ge
Auditors
Ernst & Young LLP
25 Churchill Place
Canary Wharf
London
E14 5EY
United Kingdom
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS13 8AE
United Kingdom
This information is provided by RNS
The company news service from the London Stock Exchange
END
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