Half-year Report

Georgia Healthcare Group PLC

2nd quarter and half-year 2016

Results

http://www.rns-pdf.londonstockexchange.com/rns/1224H_1-2016-8-14.pdf 

www.ghg.com.ge

Name of authorised official of issuer responsible for making notification:

Ekaterina Shavgulidze, Head of Investor Relations

An investor /analyst earnings call for the 2Q and 1H 2016 results, orginised by GHG, will be held on Monday, 15 August 2016, at 14:00 UK / 15:00 CET / 09:00 U.S Eastern time. Please find below the dial ins:

FORWARD LOOKING STATEMENTS

This document contains statements that constitute "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.

While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other factors could cause actual developments and results to differ materially from our expectations.

These factors include, but are not limited to the following: (1) general market, macroeconomic, governmental, legislative and regulatory trends; (2) movements in local and international currency exchange rates; interest rates and securities markets; (3) competitive pressures; (4) technological developments; (5) changes in the financial position or credit worthiness of our customers, obligors and counterparties and developments in the market in which they operate; (6) management changes and changes to our group structure; and (7) 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 those filed with the respective authorities.

When relying on forward-looking statements, investors should carefully consider the foregoing factors and other uncertainties and events. Accordingly, we are under no obligations (and expressly disclaim such obligations) to update or alter our forward-looking statements whether as a result of new information, future events, or otherwise.

Georgia Healthcare Group PLC ("GHG" or the "Group" - LSE: GHG LN), announces the Group's second quarter and half year 2016 consolidated financial results. Unless otherwise mentioned, comparatives are for the second quarter of 2015. The results are based on International Financial Reporting Standards ("IFRS") as adopted in the European Union ("EU"), are unaudited and extracted from management accounts.

HIGHLIGHTS

GHG announces today the Group's 2Q16 and 1H16 consolidated results, reporting a record half year profit of GEL 45.2 million (US$19.3 million/GBP 14.4 million) and earnings per share ("EPS") of GEL 0.29 (US$ 0.13 per share/GBP 0.09 per share).

GHG - the leading integrated player in the Georgian healthcare ecosystem of GEL 3.4 billion aggregate value 

1H16 financial performance

§ Net profit was GEL 45.2 million (US$ 19.3 million / GBP 14.4 million), (up 239.6% y-o-y)

§ Net profit, adjusted was 18.1 million1 (US$ 7.7 million / GBP 5.8 million)

§ EPS was GEL 0.29 (US$0.13 / GBP 0.09 per share)

§ EPS, adjusted, was GEL 0.152 (US$0.07 / GBP 0.05 per share)

§ Revenue was GEL 174.2 million (up 55.5% y-o-y)

§ EBITDA was GEL 34.0 million (up 44.2% y-o-y)

§ Return on Average Equity ("ROAE"), adjusted, was 14.2%3

2Q16 financial performance

§ Net profit was GEL 32.2 million (US$ 14.2 million / GBP 10.6 million), (up 371.6% y-o-y, up 176.2% q-o-q)

§ Net profit, adjusted, was GEL 8.1 million (US$ 3.4 million / GBP 2.6 million)

§ EPS was GEL 0.22 (US$0.09 / GBP 0.07 per share)

§ EPS, adjusted, was GEL 0.08 (US$0.03 / GBP 0.02 per share)

§ Revenue was GEL 101.7 million (up 76.9% y-o-y, up 40.1% q-o-q)

§ EBITDA was GEL 16.9 million (up 25.3% y-o-y, down 1.4% q-o-q)

§ Return on Average Equity ("ROAE"), adjusted, was 12.8%

1 Net profit 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. For details on the deferred tax adjustments, see the explanation in the bullet point immediately preceding "Healthcare services business" on page 5.

2 Earnings per share (EPS) equals Profit for the period attributable to shareholders of the Company adjusted for one-off non-recurring gain due to deferred tax adjustments and adjusted for one-off translation loss in June divided by weighted average number of shares outstanding during the same period.

3 Profit for the period attributable to shareholders of the Company adjusted for one-off non-recurring gain due to deferred tax adjustments and adjusted for one-off translation loss in June, divided by average equity attributable to shareholders of the Company for the same period net of unutilised portion of IPO proceeds

Healthcare services - the largest healthcare services provider in the fast-growing, predominantly privately-owned, Georgian healthcare services market

1H16 financial performance

§ Revenue was GEL 119.2 million (up 34.8% y-o-y)

§ Organic revenue growth was 13.0% y-o-y

§ Gross profit was GEL 53.7 million (up 40.9% y-o-y)

§ EBITDA was GEL 35.0 million (up 56.6% y-o-y)

§ EBITDA margin was 29.3% (up 400 bps y-o-y)

§ Operating leverage was positive at 21.9 percentage points y-o-y

§ Net profit was GEL 47.5 million (up 280.5% y-o-y)

§ Net profit, adjusted, was 20.3 million, (US$ 8.7 million / GBP 6.5 million)

2Q16 financial performance

§ Revenue was GEL 58.8 million (up 28.7% y-o-y, down 2.8% q-o-q)

§ Gross profit was GEL 26.7 million (up 29.4% y-o-y, down 1.4% q-o-q)

§ EBITDA was GEL 17.2 million (up 35.4% y-o-y, down 3.7% q-o-q)

§ EBITDA margin was 29.2% (up 140 bps y-o-y, down 30 bps q-o-q)

§ Operating leverage was positive at 10.8 percentage points y-o-y

§ Net profit was GEL 35.3 million (up 414.6% y-o-y, up 190.8% q-o-q)

§ Net profit, adjusted, was 9.9 million (US$ 4.2 million / GBP 3.2 million)

Pharma business - the third largest pharmaceutical retailer and wholesaler in Georgia

2Q16 and 1H16 financial performance4

§ Revenue was GEL 30.7 million

§ Gross profit was GEL 5.6 million

§ EBITDA was GEL 0.6 million

§ Net loss was GEL 0.4 million

4 Pharma business financials are included since 1st of May 2016, as GHG completed the acquisition of the pharma business in May 2016 and started consolidation afterwards

Medical insurance business - the largest medical insurance provider in Georgia

1H16 financial performance

§ Net insurance premiums earned were GEL 29.1 million (up 4.7% y-o-y)

§ Gross profit was GEL 2.3 million (down 49.0% y-o-y)

§ Loss ratio was 85.7% (up 7.1 percentage points y-o-y)

§ Expense ratio was 21.0%5 (up 3.1 percentage points y-o-y)

§ Combined ratio was 106.6% (up 10.0 percentage points y-o-y)

§ EBITDA was negative at GEL 1.5 million

§ Net loss was GEL 1.9 million

2Q16 financial performance

§ Net insurance premiums earned were GEL 15.3 million (up 8.3% y-o-y, up 10.6% q-o-q)

§ Gross profit was GEL 1.3 million (down 44.0% y-o-y, up 33.2% q-o-q)

§ Loss ratio was 85.0% (up 6.9 percentage points y-o-y, down 1.4 percentage points q-o-q)

§ Expense ratio was 21.8% (up 4.5 percentage points y-o-y, up 1.7 percentage points q-o-q)

§ Combined ratio was 106.8% (up 11.4 percentage points y-o-y, up 0.3 percentage points q-o-q)

§ EBITDA was negative at GEL 0.8 million

§ Net loss was GEL 1.7 million

5 In prior year GHG financial statements, the Group had offset agents' commission fees paid for attracting insurance premiums with insurance revenue. Therefore insurance revenue was presented on a net basis in all prior period accounts. The Group reconsidered the presentation and decided that separate presentation of agents' commissions aids

Notable developments and operating performance highlights in 2Q 2016

§ In May 2016, we completed the acquisition of GPC, one of the largest retail and wholesale pharmacy chains in Georgia, becoming the major purchaser of pharmaceutical products in Georgia. We also became the leading integrated player in the Georgian healthcare ecosystem of GEL 3.4 billion aggregate value.

§ In June 2016, we announced the appointment of Givi Giorgadze as CEO of our medical insurance business, with effect from 1 July 2016. Givi brings with him strong knowledge of the Georgian insurance and private banking business, and his expertise will be invaluable to improve the results of our medical insurance business.

§ The total number of employees reached 11,884, of which 9,745 were at the healthcare services business, 1,702 at the pharma business and 437 at the medical insurance business. Total number of employees grew by 3,344 employees, or at 39.2%, compared to a year ago mainly driven by the acquisition of JSC GPC and outpatient rollout.

§ The number of physicians was 2,954 and the number of nurses was 2,795, as of 30 June 2016, an increase 459 physicians and 475 nurses versus the same time last year, and implying a y-o-y growth of 18.4% and 20.5%, respectively.

§ We have completed implementation of new enterprise resource planning system (ERP), a software for data collection, transaction capturing, accounting and further analysis of financial transactions. The ERP enhances our capabilities to identify and extract further efficiencies in our operations.

§ In May 2016 the parliament of Georgia approved change in current corporate taxation model, with changes applicable from 1 January 2017 for all entities apart from financial institutions, including insurance businesses (the changes are applicable to financial institutions, including insurance businesses, from 1 January 2019). The changed model implies zero corporate tax rate on retained earnings and 15% tax rate on distributed earnings, compared to the previous model of 15% tax rate charged to the company's profit before tax, regardless of the retention or distribution status. The change had an immediate impact on deferred tax asset and deferred tax liability balances ("deferred taxes") attributable to previously recognized temporary differences, arising from prior periods. The Group considers the new regime as substantively enacted effective June 2016 and thus has re-measured its deferred tax assets and liabilities as at 30 June 2016. The Group has estimated the portion of deferred tax assets or liabilities that it expects to utilize by 1 January 2017 for its non-financial businesses and the portion of the deferred tax assets or liabilities it expects to utilize by 1 January 2019 for its financial businesses. Based on such assessment, the Group has fully written off the unutilized portion of deferred tax assets and liabilities. The deferred tax liabilities that were reversed significantly exceeded the deferred tax assets written off6. The net amount ("Deferred tax adjustments") was recognized as an income tax benefit for the Group and amounted to GEL 25.1 million. The amount is reflected as a non-recurring income tax benefit item in the income statement. The amount is fully attributable to the Group's healthcare services business. The deferred tax assets and liabilities remaining as of 30 June 2016 are attributable to only those temporary differences that are expected to be utilized or reversed prior to 1 January 2017.

6 Gross deferred income tax liability was GEL 26.7 million while the gross income tax asset was GEL 1.5 million. Net income tax benefit recognised in the income statement represents the net of these two amounts. Significant deferred tax liabilities that were reversed arose from the timing differences between the IFRS balance sheet and the tax balance sheet relating to accumulated depreciation, allowance for impairment of receivables, share-based compensation, intangible assets, accruals of certain provisions, and various other items.

Healthcare services business

§ As of 30 June 2016, our healthcare services business operated 15 referral hospitals, 20 community hospitals and 6 ambulatory clusters (consisting of 9 district ambulatory clinics and 28 express ambulatory clinics).

· We have launched one of the largest outpatient and diagnostic centres (the "Centre") in Georgia. The Centre is part of the Deka hospital ("Deka") and is the first department launched at Deka since the start of its renovation in January 2016. Equipped with advanced medical equipment, the Centre will cater to all age groups and will provide a comprehensive range of diagnostic and outpatient services.

· We have launched two ambulatory clusters in Tbilisi: one in the Mtatsminda neighbourhood, covering a population of c.105,000 and another in the Isani neighbourhood, covering a population of c. 300,000.

§ As of 30 June 2016, total beds operated were 2,467 (down from 2,686 since 1Q16), of which 2,005 beds were at referral hospitals (down from 2,229 since 1Q16) and 462 beds were at community hospitals (up from 457 since 1Q16). The change in total number of beds is primarily due to: 1). disposal of the 82-bed Tbilisi Maternity Hospital "New Life" ("New Life"), in exchange for the 33.3% minority shareholding in Iashvili that GHG acquired in February 2016 2). there is a temporary reduction in the number of operating beds at Deka and Sunstone Hospitals, due to the renovation of these two hospitals.

§ Our healthcare services market share by number of beds was 25.1% as of 30 June 2016. The change in market share by number of beds, from 26.6% to 25.1% is due to the reduced number of referral hospital beds as explained above.

§ Our hospital bed occupancy rate was 57.6% in 2Q16 (60.4% in 1Q16).

§ Our referral hospital bed occupancy rate was 64.9% in 2Q16 (66.7% in 1Q16).

§ The average length of stay at referral hospitals was 5.3 days in 2Q16 (5.2 in 1Q16).

§ During 2Q16, we spent a total of GEL 31.9 million on capital expenditures, up 122.1% y-o-y, enhancing our service mix and introducing new services to cater unfulfilled demand. Of this, maintenance capex was GEL 2.1 million.

· We expanded our fleet of ambulances and added 22 regular and 28 specialised ambulance vehicles (specialised ambulances are equipped with intensive care equipment and have paramedics on-board). We now operate 22 regular and 42 specialised ambulance vehicles. Our ambulances play a feeder role for our hospitals, as they facilitate the movement of patients to and between our hospitals, improving utilisation of our facilities and medical personnel. We are investing in more specialist ambulances and staff to enhance our patient referral services (where we believe we are already the market leader).

· We launched an In Vitro Fertilisation service ("IVF") at Caraps Medline ("Caraps") - an up-scale boutique hospital in Tbilisi, particularly renowned for gynaecology and plastic surgery services in Georgia. 40 patients have received treatment since the launch of the service.

· We are in the process of launching around 50 new services at nine of our referral hospitals. This includes some basic services (like pediatrics, neonatology, diagnostics, ophthalmology, mammography and breast surgery, gynecology, cardio-surgery, traumatology, angio-surgery, intensive care, reproductive services, etc.) as well as sophisticated services (like oncology, transplantation of bone marrow, paediatric kidney transplant, etc.).

· We completed the renovation of our hospitals in the Samtskhe region (capex of GEL 9.3 million), which became fully operational in 1Q16.

· Renovation of Sunstone (c.332 beds, scheduled launch in May, 2017) and Deka (c.310 beds, scheduled launch in May, 2017) is ongoing within schedule and budget.

§ We expanded fields of our residency program in line with our strategy to develop a new generation of doctors. We obtained accreditation for internal medicine, endocrinology, pediatric gastroenterology, and pediatric endocrinology, with a total capacity of an additional 15 residents to be enrolled. We launched residency programs at the end of 2015 and now have 58 residents involved in different fields.

Pharma business

§ The pharma business operates a country-wide distribution network of 110 pharmacies in major cities, 25 of these pharmacies also have express ambulatory clinics. It also operates two warehouses

§ Since we completed the acquisition of the pharma business in May 2016, we have launched the integration activities and among other things:

§ We opened pharmacies in eight of our hospitals, with the number of pharmacies at our hospitals reaching 14 units

§ We have eliminated the majority GEL 1.4 million of unnecessary costs, the results of which are expected to be reflected starting from the third quarter 2016 results

§ We have launched negotiations with suppliers to achieve better purchase pricing and achieved more than half of (anticipated GEL 3 million) cost synergies as a result of the consolidated purchasing of our healthcare services and pharma business

§ We launched a bundled product for the customers of our pharma and healthcare services businesses, to tap into c.410 thousand GPC clients that have never been to our ambulatory clinics

§ The pharma business has c.1 million retail customer interactions per month, c.0.5 million loyalty card members and an average bill size of GEL 13.0

§ The pharma business has a c.15% market share measured by sales

§ The total number of bills issued during the two month period of May and June was more than 1.9 million

Medical Insurance business

§ The number of insured clients was 203,000 as at 30 June 2016

§ Our medical insurance market share was 34.0% based on net insurance premium revenue, as at 31 March 2016

§ Our insurance renewal rate was 75.7% in 2Q16

CHIEF EXECUTIVE OFFICER STATEMENT

I am pleased with the Group's further progress in the first half of 2016, as we continue to deliver a strong performance in our Healthcare Services business and have started the integration process for our second quarter acquisition GPC, the Pharma Business. The Group's profit of GEL 45.2 million in the first half of 2016 more than tripled the GEL 13.3 million made in the first half of 2015, although the reported results have been significantly affected by a number of one-off items and business changes, in particular the impact of deferred tax releases due to a recent corporate tax legislation change and a currency translation loss relating to the acquisition of GPC.

Record Group revenues, at GEL 174.2 million for the half-year, increased by 55.5%, despite the disposal of the Tbilisi Maternity Hospital New Life and the temporary reduction in the number of operating beds at Deka and Sunstone hospitals. The Group's overall performance continues to be dominated by the healthcare services business which delivered half-year revenues of GEL 119.2 million, supported in particular by double-digit organic revenue growth with an EBITDA margin of 29.3%. We continue to benefit significantly from our strong business growth and increasing economies of scale.

The first half has continued to reflect the further development of the Group's key strategic priorities: to achieve one-third market share by hospital beds; to deliver a rapid launch of ambulatory clinics in the highly fragmented and underpenetrated outpatient market; and to invest to close existing medical service gaps. We continued to make progress in each of these strategic priorities during the first half of the year.

In our healthcare services business, we have already made substantial progress in the renovation work on both our Deka and Sunstone hospital facilities. In addition, in early August, we opened one of the largest diagnostic centres in Tbilisi as a part of the Deka hospital - the first step in developing Deka into a flagship multi-profile hospital in Georgia. Both newly modernised multi-profile hospital renovations remain firmly on schedule and within budget, and both are expected to be fully completed and operational in mid-2017. While the ongoing renovations of the Sunstone and Deka hospitals and the disposal of New Life Hospital have affected the level of revenue growth during Q2, new openings and good levels of organic growth at existing facilities put us in a strong position for the second half and beyond. We also completed the renovation of our hospitals in the Samtskhe region in the first quarter of 2016, and these are now fully operational.

Our strategy to increase our share of healthcare revenues through the roll-out of a nationwide network of ambulatory clinics has begun and by the end of July 2016 we had opened 6 ambulatory clusters in a number of high population density areas of Tbilisi and one in Kutaisi, the second largest city in Georgia. As a result, revenue from ambulatory clinics increased by 187.8% 2Q over 2Q and our outpatient share of revenue went to 5% of healthcare services revenue, up from a 2% contribution in the same period last year. The ambulatory clinic roll-out is an extremely significant growth opportunity for the Group over the next few years, as we plan to build significant market share in what is a highly fragmented and high margin segment of a market in which we currently have only approximately a 1% share of the market. Our recent acquisition of GPC has already started to further accelerate this strategy.

In Q2 we completed the acquisition of GPC, one of the largest retail and wholesale pharmacy chains in Georgia, and started to implement our integration activities. We are fully on track to deliver our initial guidance on synergies. This acquisition supports our desire to be the leading integrated provider in all areas of the GEL 3.4 billion healthcare ecosystem, and positions the Group as the largest purchaser of pharmaceutical products in Georgia with a platform to deliver significant cost synergies. More than half of the GEL 5 million annualised cost synergies that we initially targeted to meet have already been achieved, these will be captured in the results of second half of the year and we continue working to deliver the synergies in full. Overall, we aim to achieve c.GEL 9-10 million of revenue synergies from the opening of GPC pharmacies in GHG's existing hospitals and flagship ambulatory clinics. We have launched ten such pharmacies during the past two months in main facilities, bringing total number of GPC pharmacies at our healthcare facilities to 14.

We believe the biggest value enhancement in the GPC acquisition, however, is the potential for increased customer acquisition for our outpatient business through GPC's 1 million customer interactions and 0.5 million loyalty program users and we have already started to explore this opportunity. Just recently we launched a bundled product for GPC and Evex to tap around 400,000 GPC customers that have never been to our outpatient facilities and anticipate to increase the traffic to our outpatient facilities through this very important distribution channel.

Our medical insurance business continues the process of stabilising its revenues, following the recent period of reductions reflecting the Government's increased focus on the Universal Healthcare Programme which led to an industrywide reduction in medical insurance revenues over the last few years. Overall medical insurance revenues grew by 4.7% in the first half, supported by a 48% increase in retail sales of private medical insurance, offset by the non-renewal of one large corporate insurance client at the end of 2015. Costs remained well managed, but the impact of last year's Lari devaluation against the US Dollar and the increased utilisation by the largest client, the Ministry of Defense employees, led to the loss ratio increasing by 7.1 percentage points half-year over half-year to 85.7%, and the insurance business delivering a net loss of GEL 1.7 million in the first half of 2016. The loss ratio excluding the Ministry of Defense stood at 81%. We are currently in the process of renegotiating the contract with this client and, if we manage to agree terms, we would expect to achieve stabilization of our medical insurance performance very quickly. Alternatively the contract will expire in 5 months which will automatically remove this one off negative effect from our insurance business by the year-end.

From a macroeconomic perspective, Georgia has continued to deliver a remarkably resilient performance. Georgia's real GDP growth was 2.9% year-on-year in June 2016. In addition, the Lari has recently strengthened against the US Dollar by over 5%, Foreign Direct Investment continued to be strong, and tourist numbers - a significant driver of US$ inflows for the country - continue to rise significantly. As a result, the Georgian Government's fiscal position continues to be strong.

I mentioned in my statement with the first quarter results that a change in the Georgian Government's tax policy was going through Parliament and was expected to significantly benefit Georgian companies. This change has now been ratified by Parliament and, as a result, a tax code amendment is in the process of being implemented that will apply Income tax (currently 15%) only to distributed profits. Undistributed profits will no longer be subject to Profits tax. This amendment is expected to take effect for most companies on 1 January 2017, and for financial companies (including banks and insurance companies) from 1 January 2019. This will significantly reduce the effective tax rate of the Group from 1 January 2017 onwards. As a result of this change, the Group has recognised a one-off deferred taxation release of GEL 25.1 million in the first half of 2016.

In addition, new legislative initiatives from the Ministry of Health, that include the streamlining of licensing requirements and the introduction of leveling of hospitals, are expected to be enforced from 2017. These changes are likely to ensure our healthcare services business remains very well positioned to capture an increased flow of revenue and patients from the UHC.

We believe we remain well positioned to continue delivering a strong performance throughout 2016 and beyond, from both high levels of organic revenue growth as well as from the benefits of our key strategic priorities and recent acquisitions. We remain comfortably on track to deliver our targeted more than doubling of 2015 healthcare services revenues by 2018.

Nikoloz Gamkrelidze,

CEO of Georgia Healthcare Group PLC

FINANCIAL SUMMARY

Note: healthcare services business, pharma business and medical insurance business financials do not include interbusiness eliminations. Detailed financials, including interbusiness eliminations, are provided in selected financial information section

Note: healthcare services business, pharma business and medical insurance business financials do not include interbusiness eliminations. Detailed financials, including interbusiness eliminations, are provided in selected financial information section

DISCUSSION OF GROUP RESULTS

Georgia Healthcare Group PLC is the UK incorporated holding company of the largest healthcare services business, pharma business and medical insurance provider in the fast-growing, predominantly privately-owned, Georgian healthcare market.

Income statement, GHG consolidated

We delivered record quarterly revenue of GEL 101.7 million, up 76.9% y-o-y and up 40.1% q-o-q. Growth was driven by healthcare services gross revenue, up 29.6% y-o-y (with strong organic growth of 11.3% y-o-y) and pharma business consolidation since its acquisition in May 2016. In 2Q16, GHG revenue breakdown is as follows: healthcare services business revenue accounted for more than 55%, pharma business revenue accounted for c.30% and medical insurance business revenue accounted for c.15%.

We started consolidation of the newly acquired pharma business in May 2016. The pharma business has thinner margins compared to our healthcare business and therefore this has affected the growth dynamics of our consolidated figures.

Cost of services reached GEL 67.4 million, up 99.9% y-o-y and 52.6% q-o-q. The cost of healthcare services grew in line with revenues (up 29.8% y-o-y and down 4.8% q-o-q, compared with the change in revenues of up 29.6% y-o-y and down 3.3% q-o-q). The 18.7% growth in cost of insurance services, outpaced the 8.3% growth in respective revenue y-o-y; nevertheless, the q-o-q trend was favourable, with the cost of insurance services growing at 8.9% compared to 10.6% growth in respective revenue. Finally, headline growth in cost of services appears higher due to the consolidation of the pharma business financial results, which have thinner margins compared to healthcare services.

Consequently, gross profit for 2Q16 reached GEL 33.6 million, up 46.7% y-o-y and up 19.8% q-o-q. The growth was primarily driven by the healthcare business, partially offset by medical insurance and affected by the pharma business consolidation.

Operating expenses increased by 75.6% y-o-y and 55.1% q-o-q. Growth compared to last year, was favourably affected by the positive operating leverage in the healthcare business at 10.8 percentage points, which was partially offset by the negative operating leverage in the medical insurance business at 83.8 percentage points coupled with the impact of the pharma business consolidation. The 55.1% q-o-q increase in operating expenses is attributable to listing related costs (such as Annual Report etc.), as well as costs associated with pre-launches of new ambulatory clinics and new services.

As a result, we reported quarterly EBITDA of GEL 16.9 million, up 25.3% y-o-y and down 1.4% q-o-q. The y-o-y growth was primarily driven by the healthcare services business which grew its EBITDA by 35.4%, partially offset by the results of our medical insurance business with 203.9% decline in EBITDA and the consolidation of the pharma business.

The company is still in an intensive capex phase, and respectively, depreciation and amortisation expenses increased by 78.5% y-o-y which was primarily driven by acquisitions and sizeable development projects. The decrease in net interest expense to GEL 3.5 million, down 42.3% y-o-y and up 109.5% q-o-q, is mainly attributable to reduced total borrowings to GEL 141.3 million as at 30 June 2016, down from GEL 195.5 million a year ago, in line with our strategy of deleveraging through IPO proceeds. The increase in interest expense q-o-q is driven by 1) new lines of funding raised to replenish the sources needed for the ongoing development projects; 2) consideration paid for the acquisition of GPC, which in turn reduced our interest income from deposits 3) consolidation of GEL 15.2 million leverage of the pharma business. The Group prepaid debt to utilise the available cash post-IPO, subsequently realising significant savings in interest expenses, and focused its efforts to raise less expensive funding both from local commercial banks and DFIs in time to fund the capex pipeline.

The main reason for the foreign currency loss is the short position in foreign currency, which resulted from the acquisition of GPC for cash consideration of USD 14 million. To mitigate the foreign currency related risk, we purchased a foreign currency swap in July 2016.

Consequently, our profit for the period amounted to GEL 33.2 million, up 371.6% y-o-y and up 176.2% q-o-q. The healthcare services business was the sole driver of the 2Q16 Group profit, with GEL 35.3 million profit for 2Q16 (up 414.6% y-o-y and up 190.8% q-o-q), which was partially offset by loss of GEL 0.4 million and GEL 1.7 million, recorded by the pharma and medical insurance businesses, respectively. Group profit, adjusted for the impact of deferred tax (see the explanation in the bullet point immediately preceding "Healthcare services business" on page 5) and translation loss adjustments, was GEL 8.1 million in 2Q16 (up 61.2% y-o-y and down 20.1% q-o-q) and GEL 18.1 million for 1H16 (up 130.6% y-o-y).

Selected balance sheet items, GHG consolidated

As a result of recent acquisitions and the IPO completed in November 2015, our balance sheet increased substantially over the last 12 months reaching GEL 814.1 million as at 30 June 2016. The growth of total assets by GEL 310.0 million y-o- y was largely driven by the 56.7% (GEL 181.5 million) increase in property and equipment, reflecting the acquisition of new hospitals in 2015 and the pharma business in 2016. The pharma business consolidation primarily affected goodwill and inventories. Cash and bank deposits have decreased as a result of settlement of the GPC acquisition together with ongoing development capex.

Borrowed funds have decreased y-o-y and increased q-o-q due to above mentioned reasons. The increase in accounts receivable is primarily due to an increase in revenues of healthcare services by 34.8% y-o-y. The increase in shareholders' equity largely reflects the primary placement of equity shares in the IPO.

Statement of cash flow, GHG consolidated

7 Statement of Cash Flows adjusted for effect of accelerated payments of aged accounts payables in 1H 2016 as compared to 1H 2015.

The revenue cash conversion ratio, on a consolidated basis, equalled 91.6% in 1H16 compared to 88.9% in 1H15. This translated into an EBITDA cash conversion ratio of 72.9% on a consolidated adjusted basis, in 1H16. Significant growth across all operating cash flow lines reflects the material acquisitions completed since June 30, 2015. To provide a business as usual picture for 1H16 cash flows, we have made a few adjustments for non-recurring cash flow items: In our healthcare services business, we accelerated settlement of aged payables to suppliers which increased our business as usual cost of healthcare services paid by GEL 0.6 million or 1.0%; we also accelerated payment of aged general and administrative expenses by GEL 3.8 million or 40.4%; we provided additional working capital to pharma business in the amount of GEL 5.4 million, to support margin enhancement of the business and finance its expansion into GHG's healthcare facilities and a one-off tax settlement of GEL 1 million related to HTMC, which was a result of the tax audit conducted during its acquisition (the settled amount had been fully provisioned at the time of acquisition). The adjusted operating cash flow of our healthcare subsidiary equalled GEL 23.8 million, which increased by GEL 7.0 million or 41.5% since 1H15. The increase was mainly a result of a GEL 30.6 million or 43.0% increase in healthcare services revenue received in 1H16 compared to 1H15.

Net cash flows used in investing activities mostly comprise the acquisitions (HTMC and pharma business), as well as capex investments in line with the Group's original three year business plan. Following a successful IPO in November 2015, net cash flows used in financing activities mostly reflects repayments of borrowings, which were also reflected in reduced interest charges.

We invest in medical technology, on the back of renovated infrastructure, enhancing our service mix and introducing new services to cater to unfulfilled demand, as indicated by low incidence levels that lag far behind peer benchmarks. We define development capex as additions to GHG's property, plant and equipment, excluding acquisitions. During 2Q16, we spent a total of GEL 31.9 million on capital expenditure, an increase of 122.1% y-o-y. Of this, maintenance capex was GEL 2.1 million.

DISCUSSION OF SEGMENT RESULTS

The segment results discussion is presented for healthcare services business, pharma business and medical insurance business.

Discussion of Healthcare Services Business Results

Our healthcare services business consists of hospitals and ambulatory clinics and provides the most comprehensive range of inpatient and outpatient services in Georgia. We target the mass market segment through our vertically integrated network of 35 hospitals and six ambulatory clusters (with 37 ambulatory clinics), as at 30 June 2016. We are the single largest market participant, accounting for 25.1% of total hospital bed capacity in the country as of 30 June 2016.

Income Statement, healthcare services business

In 2Q16, our healthcare services business recorded quarterly revenue of GEL 58.8 million, up 28.7% y-o-y and down 2.8% q-o-q. The y-o-y growth implies 11.3% organic growth. This translated into GEL 119.2 million revenue for the first half of 2016, growing at 34.8% y-o-y, of which 13.0% was driven organically. Lower quarterly revenue growth is primarily attributable to:

 1) The seasonality of the hospital operations, with higher utilization levels coming in the late winter and early spring season. This is reflected in lower occupancy rates compared to 1Q16 (all hospital bed occupancy rate was 57.6% in 2Q16 compared to 60.4% in 1Q16, and referral hospital bed occupancy rate was 64.9% in 2Q16 compared to 66.7% in 1Q16)

 2) Lower revenue from the hospitals under renovation (Deka and Sunstone), as the number of operating beds have been temporarily reduced (as per our plans) to enable a smooth renovation process

3) The disposal of "New Life", which was previously consolidated, in exchange for the 33.3% minority shareholding in Iashvili - this has had a negative effect on revenues but favourable effect on the bottom line, as the stake acquired has made a bigger contribution to the profit attributable to shareholders than the respective profit from "New Life"

 4) The streamlining by the government of the pricing and scope of the urgent care services under UHC, effective 1 April 2016.

Revenue by business lines, healthcare services business

Healthcare services revenue growth of 28.7% y-o-y was driven by all three business lines. The largest contributors to the growth were referral hospitals as well as ambulatory clinics, the roll out of which continues in line with our strategy. Referral hospitals posted GEL 49.7 million of revenue in 2Q16, up 26.3% y-o-y driven by strong organic growth as well as acquisitions completed during 2015. Referral hospitals contributed 86% to total revenue from healthcare services. We expect a significant portion of the future growth of our healthcare revenue to come from referral hospitals, in line with our strategy to increase the market share to 1/3 across Georgia through further investments in renovation and expansion of existing facilities, as well as investments in new services. The 11.3% organic growth of revenue from healthcare services was largely sourced from referral hospitals, and almost all of the M&A driven growth came from referral hospitals, mainly driven by the HTMC acquisition completed during 2015. HTMC contributed GEL 9.7 million to gross healthcare services revenues in 2Q16.

Community hospitals, contributing 9% to total revenue from healthcare services, also posted a strong 22.2% y-o-y growth in revenue, reaching GEL 5.4 million in 2Q16. As community hospitals play a feeder role for the referral hospitals, we expect a moderate growth in this line.

Ambulatory clinics contributed 5% to total revenue from healthcare services, up from 2% contribution during the same period last year. Ambulatory clinics posted revenue of GEL 3.0 million in 2Q16, up 187.8% y-o-y and up 43.2% q-o-q. The revenue growth was entirely organic, driven by the launch of four new ambulatory clusters since the second half of 2015. These launches brought the number of ambulatory clusters we currently operate to six (consisting of 9 district ambulatory clinics and 28 express ambulatory clinics). We expect revenue from ambulatory clinics to accelerate growth over the next few years, in line with our strategy of launching a total of 10-12 ambulatory clusters more than 40 ambulatory clinics through 2018. Three new clusters are currently under development and will be launched within the next few months.

 Revenue by sources of payment, healthcare services business

UHC continued to be the main driver of our healthcare services revenue growth in 2Q16, resulting in revenue from government-funded healthcare programs of GEL 41.8 million, up 28.1% y-o-y and down 7.8% q-o-q. That constituted c.72% of total net healthcare services revenues - similar to the share a year ago. Since the full rollout of UHC in mid-2014, government expenditure on healthcare has grown considerably, increasing 81.4% from GEL 487.9 million in 2013 to an expected GEL 885.0 million in 2016, according to the approved government budget for 2016.

The Ministry of Labor, Health and Social Affairs ("MOLHSA") has recently conducted a review of the effectiveness of the existing model of the healthcare financing by the state, which was introduced in 2014 with the current scope. As a result of the review, the government is undertaking several initiatives to improve the effectiveness and efficiency of the existing system. The initiatives that have been announced include:

- Streamlining the licensing requirements for hospitals, particularly around the intensive care. MOHLSA has set set a maximum threshold for the ratio of intensive care beds to total beds at the hospital at 30%. This change is aimed at reducing the number of recently emerged small hospitals that have a high number of intensive care beds relative to regular beds and therefore provide high risk intensive care services with insufficient infrastructure and resources ("ineligible hospitals"). As a result, we expect that a portion of patients that require certain sophisticated care will be redirected to the larger hospitals -such as GHG referral hospitals. This change is expected to be favourable for GHG hospitals - we expect that our referral hospitals will capture part of the flow of patients that will be redirected from ineligible hospitals. This initiative is approved and is expected to become effective from the beginning of 2017.

- Introducing levelling of hospitals based on their capabilities (measured by a number of factors, including number of beds, specialised beds to total beds, relevant equipment and personnel, etc.). Once introduced, this change will redirect patients for sophisticated services from low level to higher level (referral) hospitals. Given that GHG has leveled its hospitals and operated a referral model since the beginning of 2012, including differentiated pricing at community and referral hospitals, we expect that this change will have a favourable effect on GHG hospitals, as it is expected to increase patient referrals to our referral hospitals and we don't expect that the patient flow to our community hospitals will decrease. On the other hand, this change is expected to negatively affect a number of competitor hospitals that currently provide services beyond their capacity or resources. Such hospitals will have to cease provision of certain sophisticated resources or invest in enhancing physical, technological and physician capabilities of their facilities. Furthermore, the expectation is that the pricing will be differentiated between lower and higher level hospitals, with higher level hospitals charging more compared to lower level hospitals. This initiative is at an advanced stage and is expected to become effective from the beginning of 2017.

- Streamlining pricing and scope of the urgent care services under UHC. This amendment implies change in prices for a number of services, together with the revision of the scope of some of the services. For example the sub-services that need to be included in cardio-surgery and traumatology have been defined, including number of hospitalization days, pre-surgery tests, etc., with the result that, hospitals no longer can charge for those services separately as they are now included in the price of the surgery. This initiative has been implemented and has impacted GHG results to a varying degree in different hospitals.

- We expect that the net effect of these initiatives will be positive for GHG, primarily as a result of our diversified business model, as well as the existing hierarchy of our healthcare facilities.

Strong quarterly growth in revenue from our medical insurance business (up 80.2% q-o-q) is primarily due to increased utilisation of our ambulatory clinics by our medical insurance clients, which was further supported by the launches of new ambulatory clusters.

Out-of-pocket payments by patients increased to GEL 12.2 million in 2Q16, up 33.5% y-o-y and 6.6% q-o-q. The UHC imposes coverage limits on medical treatments, co-payments and has certain exclusions (i.e. charges that are not covered by the UHC). Any charges in excess of the limit and co-payments are covered by patients on an out-of-pocket basis. Increasing the government financing on healthcare services organically causes growth of the number of patients in hospitals, respectively increasing the revenue from out-of-pocket payments as well. Our healthcare services revenues from private medical insurance companies also recorded a strong increase reaching GEL 4.0 million, up 33.8% y-o-y and up 24.8% q-o-q, driven by strong organic growth. This organic growth continues to be supported by the rollout of the ambulatory clinics which attract patients with private medical insurance. The increase in our ambulatory footprint also contributed to stronger out-of pocket revenue, as UHC covers only a limited scope of outpatient services.

We expect the share of out-of-pocket payments and revenue from private medical insurance companies to increase over the next few years, as a result of the roll out of our ambulatory clinic expansion strategy, as the larger proportion of elective out-patient services are still financed by the patients themselves.

Cost of services and Gross profit, healthcare services business

Our healthcare services margins are improving as a result of the increasing utilisation and scale of our business, as well as our continued focus on efficiency and the on-going integration of recently acquired healthcare facilities. The growth of salaries and other employee benefits by 24.7% y-o-y is mainly attributable to recent acquisitions. A portion of the growth, however, was organic and reflected primarily the variable direct salary paid to revenue-generating physicians. The share of the cost of salaries and other employee benefits in the total cost of services decreased to 63% in 2Q16, down from 66% a year ago. The direct salary rate in healthcare services business (expense on direct salaries as a percentage of gross revenue) improved to 33.8% and 33.2%, for 2Q16 and 1H16, respectively.

The cost of materials and supplies was GEL 9.2 million, up 47.5% y-o-y which was primarily a result of the acquisition of HTMC, in August 2015. HTMC has a bigger share of medical-supply-intensive services in its service mix, compared to the rest of our healthcare services business. The materials rate (expense on direct materials as a percentage of gross revenue) was 15.7% in 2Q16, up from 13.7% a year ago. The quarterly gross margin (defined as gross profit divided by revenue) increased by 0.2% to 45.3%. Gross margin increased to 45.0% in 1H16, up 210bps since 1H15. As a result of the above, gross profit was GEL 26.7 million in 2Q16, up 29.4% y-o-y, and 1H16 gross profit was GEL 53.7 million compared to GEL 38.1 million a year ago, up 40.9%.

Expenses on administrative salaries and other employee benefits, which decreased to GEL 5.3 million, down 4.9% y-o-y as a result of the new day to day cost budget control procedure, implemented in the beginning of 2016. General and administrative expenses of increased to GEL 3.5 million, up 84.2% y-o-y, were primarily driven by the three main factors: 1). governance-related expenses as a result of the IPO at the end of 2015; 2) the newly launched intensive marketing campaign alongside the rollout of our ambulatory strategy, which comes on a very low base of marketing expenditure undertaken previously; 3) recruitment of several key personnel at the senior and middle management levels during the beginning of 2016 to strengthen the management bench of the Group to support the growing scale of the operations. As a result, we reported quarterly EBITDA of GEL 17.2 million, up 35.4% y-o-y and down 3.7% q-o-q.

We sustained the EBITDA margin in our healthcare services business close to our target of c.30% (we target c.30% healthcare services business EBITDA margin by 2018). Our continued focus on efficiency and the integration of newly acquired facilities resulted in the healthy EBITDA margin in our healthcare services business in 2Q16, of 29.2% and 29.3% for 1H16.

Our strong EBITDA performance in 2Q16 was further translated into a strong profit for the period of GEL 35.3 million, which grew by 414.6% y-o-y and 190.8% q-o-q. Profit for 1H16 reached GEL 47.5 million, up 280.5% y-o-y. Profit from healthcare services business, adjusted for the impact of deferred tax adjustments (see the explanation in the bullet point immediately preceding "Healthcare services business" on page 5) and translation loss, was GEL 9.9 million in 2Q16 (up 103.0% y-o-y and down 4.2% q-o-q) and GEL 20.3 million for 1H16 (up 167.0% y-o-y).

Discussion of Pharma Business Results

Our pharma business consists of retail and wholesale pharma distribution operations through 110 pharmacies mainly located in the urban locations in Georgia and 2 warehouses. 25 of these pharmacies also have express ambulatory clinics. We have approximately 1 million retail customer interactions per month, with c.0.5 million loyalty card members.

Income Statement, pharma business

We entered the pharma business as a result of the GPC acquisition in May 2016 and our results of operations include GPC results since May 2016. Our pharma business recorded revenue of GEL 30.7 million for the period of May-June 2016. Of this, GEL 23.1 million or 75% was retail revenue and the remaining GEL 7.6 million or 25% was from wholesale revenue. In terms of revenue breakdown by product mix, GEL 21.2 million or 69% was from pharmacy products and the remaining GEL 9.5 million or 31% from para-pharmacies. The share of para-pharmacies in retail revenue was c.30%.

Pharma business gross margin of 18.4% in the two months is low compared to prior periods and was affected by the pricing pressure from the competition, as they started sales discounts after GHG announced its acquisition of the pharma business. The gross margin is gradually rebounding, retail margin increased to 22.0% in July 2016, from 19.6% in May and June 2016. For the May-June 2016 period, our pharma business also recorded EBITDA of GEL 0.6 million, EBITDA margin of 1.8% and a net loss for the period of GEL 0.4 million. The pharma business has:

- c.1 million retail customer interactions per month

- c.0.5 million loyalty card members

- Average bill size of GEL 13.0

- c.15% market share measured by sales

- Total number of bills issued during the two month period of May and June was more than 1.9 million

Since we completed the acquisition, we have rolled out a number of initiatives, as announced during the acquisition, which are having a positive effect on the pharma business and are partially reflected in July 2016 results, with retail gross margin climbing to 22.0% for July from 19.6% in May and June and we expect that the effects of integration will be reflected in the results of second half of 2016. We expect that the effects of these optimization and integration efforts will continue to be reflected in the results of the operations of our pharma business throughout 2016.

Since we completed the acquisition of the pharma business in May 2016, we have launched integration activities and are on track to deliver the initial guidance on cost savings and revenue enhancement.

§ We opened pharmacies in ten of our hospitals, with the number of our pharmacies at our hospitals reaching 14 units. In total, we operated a country-wide distribution network of 110 pharmacies in major cities, 25 of which also have express ambulatory clinics. We also operate two warehouses for our pharma business as of 30 June 2016.

§ We have eliminated the majority of the unnecessary costs (GEL 1.4 million, out of GEL 1.9 million expected on an annualised basis), results of which are expected to be reflected starting from the third quarter 2016 results.

§ We have launched negotiations with suppliers to achieve better purchase pricing and achieved more than half of the cost synergies expected as a result of the consolidated purchasing of our healthcare services and pharma business (GEL 1.5 million, out of GEL 3.0 million expected on an annualised basis). We continue negotiations and expect to deliver on the initial guidance.

§ We launched bundled product for the customers of our pharma and healthcare services businesses, to tap into c.400 thousand GPC clients that have never been to our ambulatory clinics. We expect to direct approximately 12 thousand unique customers per month from our pharmacies to our ambulatory clinics, which have not used our ambulatory services before.

§ We accelerated procurement of medical disposables for our healthcare services business through our pharma business. Until the year end 2016, we expect c.GEL 4 million annualised intercompany purchases, compared to GEL 1.0 million in 2015.

Discussion of Medical Insurance Business Results

Our medical insurance business consists of private medical insurance operations in Georgia, providing medical insurance products to corporate and retail clients. It is the largest provider of medical insurance in Georgia, with a 34.0% market share based on net insurance premiums earned as of 31 March 2016 and have approximately 203,000 insurance customers as at 30 June 2016. Our medical insurance business plays a crucial role in our business model, as it is an important feeder for our healthcare services business, particularly for the ambulatory clinics, and we believe that role will grow in the future as we roll-out our ambulatory growth strategy.

Income Statement, medical insurance business