Half-year Report

2nd quarter and half-year 2018

Results

http://www.rns-pdf.londonstockexchange.com/rns/8090X_1-2018-8-14.pdf

www.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 Wednesday, 15 August 2018, at 14:00 UK / 15:00 CET / 09:00 U.S Eastern Time. The duration of the call will be 60 minutes and will consist of a 15-minute update and a 45-minute Q&A session.

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; recruitment and retention of skilled medical practitioners risk: clinical risk; concentration of revenue and the Universal Healthcare Programme; currency and macroeconomic; information technology and operational risk; regional tensions 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 2017 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 2018 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 2Q18 and 1H18 consolidated results, reporting a half year profit of GEL 28.4 million (US$11.6 million/GBP 8.8 million) and earnings per share ("EPS") of GEL 0.14 (US$0.06 per share/GBP 0.04 per share).

1 Return on invested capital ("ROIC") adjusted to exclude newly launched Regional Hospital (previously called "Deka") and Tbilisi Referral Hospital

CHIEF EXECUTIVE OFFICER's STATEMENT

The Group has continued the delivery of its key strategic priorities in the first half of 2018, with double-digit revenue growth in both the healthcare services and pharmacy and distribution businesses. Building on last year's significant investment, each business has achieved good levels of franchise growth in the first half of 2018.

The Group delivered EBITDA of GEL 62.6 million in the first half of 2018, an increase of 22% compared to the first half of last year. Both Regional Hospital (previously known as Deka) and the Tbilisi Referral Hospital (previously known as Sunstone) are now fully open and are seeing strongly improving revenue trends on a quarterly basis, reflecting consistently increasing bed occupancy rates as we continue to build both hospitals' presence in their communities. The number of registered patients in our Tbilisi polyclinics continues to grow, in support of our target of 200,000 patients. Strong sales growth and the completion of the integration of the pharmacy and distribution businesses have resulted in continued strong EBITDA margins and earnings growth; and the medical insurance business has returned to positive EBITDA following last year's repricing of the portfolio and termination of certain loss-making client contracts.

Revenues totalled GEL 419.5 million for the half, an increase of 13% y-o-y. Group EBITDA was GEL 31.2 million in the second quarter, a 20% increase year-on-year, despite the additional expense of the cost of roll-out of a number of hospital and polyclinic facilities. In addition to the normal hospital operational expenses incurred in our newly opened hospitals, the cost of healthcare services and operating expenses also includes a number of one-off expenses related to the hospital roll-outs. These expenses were mainly associated with the Regional Hospital opening and totalled GEL 1.2 million in the first half of 2018. In 1H18, the healthcare services business EBITDA increased 6% y-o-y and the EBITDA margin was 24.7% (the EBITDA margin for referral hospitals and community clinics stood at 28.4% excluding the roll-out impact). The pharma business EBITDA increased almost 40% half-on-half to GEL 24.6 million, and its EBITDA margin increased 180 basis points to 9.7% over the same period, substantially in excess of our targeted "more than 8%" margin.

In our healthcare services business, we have now completed our investment in the development of both Regional Hospital and Tbilisi Referral Hospital, and are focused on building capacity utilisation in both hospitals. The occupancy rate at our 306-bed Regional Hospital (opened in March 2018) reached 15% in the first three months after opening and the occupancy rate at Tbilisi Referral Hospital (fully-opened in December 2017) was around 40%. In our referral hospitals we have also continued to launch new services, with four new in hospital services plus a new Home Care service launched in the second quarter. We are the only provider in the Georgian healthcare market to offer an organised home care service - which enables our qualified nurses to provide professional healthcare assistance at home.

Our polyclinic network has continued to expand (revenue up 42% h-o-h), and these polyclinics now clearly stand out from their competition as new, modern facilities that provide a diverse range of high-quality services in one location. The number of our registered patients in Tbilisi has grown substantially in last 12 months and reached c.116,000 in 2Q18, from c.6,000 in 2Q17. We are targeting to reach c.200,000 registered patients by early 2019. The polyclinics posted 16.1% EBITDA margin in 2Q18, up 20 bps year-on-year.

As we have completed our major investment programme, this year's quarterly results now fully reflects depreciation and interest expenses. Over the last six months, they have affected our healthcare services business profitability, as newly opened facilities have been in the initial rollout phase. Going forward we do not expect depreciation expense to increase significantly; and our interest expense is expected to gradually reduce as business leverage decreases.

Our pharmacy and distribution business posted record first half revenues of GEL 254.2 million, with 14% year-on-year growth supported by various sales initiatives implemented across the two combined pharmacy chains, as well as the further expansion in the number of pharmacies - which now total 259 pharmacies in major cities. We plan to further expand this network to over 300 pharmacies over the next couple of years. Our wholesale distribution business also showed promising growth. Our position as the largest pharmaceuticals purchaser in the country has allowed us to further improve our operating cost efficiency and obtain higher product discounts from manufacturers. Consequently, it helped us to share the synergies with the Georgian population by providing affordable pricing on key products. The business posted 65% growth in profit, reaching GEL 19.3 million in the half.

Our medical insurance business has stabilised its earnings, following the cancellation of a number of loss-making contracts during 2017. As a result, the business delivered positive EBITDA of GEL 0.7 million in the first half, compared to an EBITDA loss of GEL 1.2 million in the same period last year. Both the expense ratio and loss ratio of the business continue to improve substantially, with the resulting combined ratio improving to 98.8% in the first half of 2018, compared to 106.2% a year ago.

As mentioned above, from a capital expenditure perspective, we have now completed the vast majority of our major development projects - the only significant project left is the Mega Lab project, which will become operational over the next couple of months. Accordingly, we are now focusing on improving our return on invested capital, which has already improved by 120 basis points over the last 12 months.

Investing in human capital and talent development continues to be high on our agenda. In 1H18 we spent GEL 1 million on development training programmes for our staff. GHG's leadership programme for middle level managers to improve their leadership and managerial skills, has become extremely popular among our employees. Currently 110 executives from our mid-level management team are engaged in a tailored six-month programme. We have also launched a Leadership Development Executive Coaching programme for top and middle level managers. It provides an individual approach towards developing leadership skills and benefits its participants with a personally tailored development experience. Currently 65 managers are involved in the programme, gaining a greater awareness of their leadership strengths and opportunities for future growth.

We remain focused on improving the knowledge and expertise of our doctors and nurses through education and practical development. Our residency programme, which improves the quality of postgraduate preparation and facilitates an increase in the number of qualified employed doctors in the country, continues to grow. It is the most popular residency programme in the country and we currently have 171 talented residents involved in the programme. Next year we will have the first graduates from this programme, who will start to work at GHG's healthcare facilities.

We continue to develop and implement quality management measures throughout our healthcare facilities. After successfully implementing a high quality clinical key performance indicator monitoring system in our referral hospitals, in 2018 we have initiated different projects which address clinical quality issues including clinical pathway improvement projects related to sepsis, pneumonia and rational antibiotic therapy.

From an IT perspective we have continued the process of digitalisation. In 2017 we implemented e-prescriptions in our healthcare facilities in Tbilisi and now we are moving to the next stage of development - implementing an Electronic Medical Record ("EMR") system in our polyclinics. This is another step towards our goal of having a have fully integrated health information system that will help us to manage more efficiently and deliver better care to our customers. GHG will be the first healthcare company in the country that will electronically store patient records. We have already started training our employees and the system will be launched before the end of this year.

Over the last three years we have been in a significant business roll-out phase in all areas of our operations, and we are now starting to see the benefits materialise: in the healthcare services business with two major new hospital renovations and launches, and the development of a nationwide chain of polyclinics; and in the pharmacy business with significant benefits achieved from the acquisitions and integration of what is now the largest pharmacy and distribution business in the country. The first half performance reflects the significant recent progress against the Group's strategic priorities, and we are well positioned to continue this progress during the second half of 2018 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 3.5 billion aggregated value. GHG comprises three main business lines: healthcare services business, pharmacy and distribution business and medical insurance business.

GHG is the single largest market participant in the healthcare services industry in Georgia, accounting for 24.9% of the country's total hospital bed capacity, as of 30 June 2018. Our healthcare services business offers the most comprehensive range of inpatient and outpatient services targeting virtually all segments of the Georgian market, through its vertically integrated network of hospitals and clinics. In 2Q18 we operated:

· 16 referral hospitals with a total of 2,825 beds, which provide secondary or tertiary level healthcare services

· 21 community clinics with a total of 495 beds, which provide outpatient and basic inpatient healthcare services

· 17 district polyclinics and 24 express outpatient clinics, which provide outpatient diagnostic and treatment services. Polyclinics are located in Tbilisi and major regional cities.

GHG is the largest pharmaceuticals retailer and wholesaler in Georgia, with a 30% market share by revenue. Our pharmacy and distribution business consists of a retail pharmacy chain and a wholesale business selling pharmaceuticals and medical supplies to hospitals and other pharmacies. The pharmacy chain operates under two separate brand names, Pharmadepot and GPC, with a total of 259 pharmacies, of which 24 also have express outpatient clinics. 21 of our pharmacies are located within our healthcare facilities.

GHG is also the second largest provider of medical insurance in Georgia with a 27.2% market share based on 1Q18 net insurance premiums. Our medical insurance business consists of private medical insurance operations in Georgia. We have a wide distribution network and offer a variety of medical insurance products primarily to the Georgian corporate sector and also to retail clients. We have approximately 157,000 persons insured as of 30 June 2018. The medical insurance business plays an important role in our business model, as it is a significant feeder for our pharmacy and distribution business and healthcare services business, particularly for the polyclinics, and we believe that role will grow in the future as we roll out our polyclinic growth strategy.

Income statement, GHG consolidated

Gross Revenue. We delivered quarterly revenue of GEL 211.8 million (up 14.7% y-o-y) and half year revenue of GEL 419.5 million (up 13.1% y-o-y). In 2Q18 y-o-y revenue growth was driven by double-digit growth in both the pharmacy and distribution and healthcare services businesses, up 14.8% and 16.3% respectively. The Group's revenue was up 2.0% q-o-q.

In 1H18, 60% of our revenues came from the pharmacy and distribution business, 34% from the healthcare services business, and the remaining 6% from the medical insurance business. This translated in 54%2 of Group's total revenue from out-of-pocket payments; from Universal Healthcare Programme ("UHC") payments 24%; and from other sources 22%.

2 Includes: healthcare services out-of-pocket revenue, pharma and medical insurance businesses' revenue from retail

Gross Profit. We delivered gross profit of GEL 65.0 million in 2Q18 (up 21.1% y-o-y) and GEL 128.9 million in 1H18 (up 17.4% y-o-y). The Group's gross margin improved y-o-y mainly due to the growth in the pharmacy and distribution business' margin, which was up 120 bps y-o-y in 2Q18 and up 80 bps y-o-y in 1H18. The primary reason for the growth remains extracted procurement synergies, as the largest pharmaceuticals purchaser in the country, as well as improved product mix in our pharmacies. The healthcare services business gross margin remains in the range of 42%, despite the impact of the flagship hospitals' roll-out costs and the Government's changes to UHC in May 2017. Adapting to last year's UHC changes by implementing new initiatives described later in this report, the medical insurance business continued to improve its loss ratio (down 660 bps y-o-y in 2Q18 and down 340 bps y-o-y in 1H18). The Group's gross margin remained flat q-o-q.

EBITDA. We reported EBITDA of GEL 31.2 million in 2Q18 (up 19.7% y-o-y) and GEL 62.6 million in 1H18 (up 22.4% y-o-y). The healthcare services business was the main contributor to the Group's 2Q18 EBITDA, contributing 60% in total, with a 24.3% EBITDA margin. The next largest contributor was the pharmacy and distribution business with 38% contribution, while posting a 9.4% EBITDA margin. Our medical insurance business also posted positive EBITDA of GEL 0.5 million, compared to the negative GEL 0.8 million EBITDA posted in 2Q17.

This year's depreciation and amortisation expense now fully reflects the Group's recent investment in sizeable development projects in our healthcare business. The y-o-y increase in net interest expense was in line with the increased balance of borrowed funds to finance planned capital expenditure. Going forward we expect Group's leverage to decrease gradually in line with the debt principal payment schedule, reducing interest expense respectively.

After launching Regional Hospital, the Group has now largely completed its major investment programme in to create high-quality care facilities with the necessary capacity to serve our patients. Going forward our main focus will be on the successful roll-out of our newly launched hospitals and broadening our continuous improvement work on costs and quality.

Profit. Our profit totalled GEL 12.4 million in 2Q18 (up 10.4% y-o-y) and GEL 28.4 million in 1H18 (up 17.1% y-o-y). The pharmacy and distribution business was the main driver of the 2Q18 Group profit, contributing GEL 8.5 million, followed by the healthcare services and medical insurance businesses contributing GEL 3.6 million and GEL 0.3 million, respectively.

Selected balance sheet items, GHG consolidated

Overall, our asset base has grown substantially over the last few years reflecting investment in the renovation of hospitals, elective care services and new polyclinic roll-outs. As noted above, the Group has now completed its intensive capital expenditure phase and the only large project remaining is the construction of the Mega Lab which we plan to open in 2018 as discussed below.  

Going forward our focus remains on the successful roll-out of newly launched hospitals and services, improving return on invested capital through improved utilsation and growing productivity. We will also capture more of the value of synergies across the Group.

Our balance sheet remained flat q-o-q, with no major deviation except for prepayments, the decrease of which is related to the completion and launch of flagship hospitals.

DISCUSSION OF SEGMENT RESULTS

The segment results discussion is presented for the healthcare services, pharmacy and distribution and medical insurance businesses.

Discussion of Healthcare Services Business Results

Operating performance highlights and notable developments, healthcare services business

Continued investment in facilities and services

§ During 2018, we are continuing to invest in the development of our healthcare facilities and services. In 2Q18 we spent a total of GEL 15.7 million on capital expenditures ("capex"), of which maintenance capex was GEL 2.1 million. Overall, in 1H18, capital expenditures totalled GEL 40.5 million, of which maintenance capex was GEL 4.4 million. The primary capex use was to finalise the renovation works on our Regional Hospital.

· We continue to launch new services at our referral hospitals to fill medical service gaps in Georgia. During 2Q18, we launched four new services in four different referral hospitals plus a Home Care service. In total, we launched eight new services in 1H18 and the process will continue throughout the year.

o In 2Q18 we launched our Home Care service in Tbilisi. We are the first provider in the Georgian healthcare market to offer this service in an organised way. Our qualified nurses will provide professional healthcare assistance at home, covering services such as transfusion, inhalation and oxygen delivery. People of all ages can benefit from Home Care, including those who have been recently discharged from a hospital, those who are recovering from surgery or major illness, or those who have received a new diagnosis or a complication arising from a chronic illness. All of these services are co-ordinated by an operating centre open 24 hours a day.

· The complete renovation of 306-bed Regional Hospital was finished and the hospital opened at the end of February 2018; its occupancy rate reached c.15% in 2Q18.

· At Tbilisi Referral Hospital - another of our flagships which was opened in April 2017, and where additional capacity was added in December 2017 - the occupancy rate stood at around 40% in 2Q18.

§ Our adjusted referral hospital bed occupancy rate3 was 63.4% in 2Q18 (67.1% in 2Q17).

3 Adjusted to exclude the Tbilisi Referral Hospital and Regional Hospital; the calculation also excludes emergency beds

§ Our healthcare services market share by number of beds stood at 24.9% as of 30 June 2018. According to recently published 2017 data by National Centre for Disease Control and Public Health ("NCDC") the number of beds continues to grow in the market. Apart from GHG, the increase mainly comes from hospitals with a relatively small market share.

4 NCDC, data as of December 2015, updated by GHG to include the changes before December 2016

5 NCDC, data as of December 2016, updated by GHG to include the changes before December 2017

6 NCDC, data as of December 2017, updated by GHG to include the changes before June 2018

§ The number of registered patients in Tbilisi polyclinics reached c.116,000 as of June 2018, up from c.6,000 in 2Q17 and up from c.66,000 at the beginning of the year. We plan to further grow our polyclinic business both organically and through further acquisitions. Our target is to reach c.200,000 registered patients by early 2019.

§ The construction of the largest laboratory in Georgia as well as in whole Caucasus region ("Mega Lab") is progressing rapidly and expected to become operational over the next couple of months. The multi-profile laboratory will be equipped with the most up-to-date infrastructure and high-capacity automated systems. The laboratory will cover basic as well as sophisticated tests such as: clinical microbiology, immunology, bacteriology, pathology, molecular genetics, etc. We plan to get Joint Commission International accreditation for Mega Lab.

Government changes to UHC implemented from May 2017

§ As reported last year, effective from May 2017 the Government introduced two significant changes to UHC: 1) revised reimbursement mechanism relating to the provision of intensive care, reducing the UHC reimbursement of these services; and 2) a new regulation which bases UHC coverage eligibility on the income level of citizens and introduced deductible amounts (patient co-payments) for planned and certain urgent services. The first change has slightly suppressed our hospitals margins, and the second may have slightly suppressed demand for our services.

Income Statement, healthcare services business

The healthcare services business recorded a record high quarterly and half year revenue of GEL 77.5 million (up 16.3% y-o-y) and GEL 151.0 million (up 13.6% y-o-y), respectively.

Revenue by types of healthcare facilities

In 2Q18, referral hospitals contributed 85% of the total revenue from our healthcare services. The y-o-y and q-o-q revenue growth is mainly a result of a successful ramp-up of the newly launched hospitals. The quarterly revenues in Tbilisi Referral Hospital (fully opened in December 2017) and Regional Hospital (diagnostic part opened in 3Q16 and inpatient part in March 2018) reached GEL 4.1 million and GEL 5.3 million respectively. Quarterly revenue dynamics for both hospitals is shown below.

Revenue dynamics of Tbilisi Referral Hospital

Revenue dynamics of Regional Hospital

Apart from the contribution from our newly launched hospitals, the y-o-y revenue increase is attributable to the demand for current services at our existing facilities where we are continuously adding new medical services. In recent years we have developed a number of new, high-quality elective care services in Georgia, in line with our strategy to improve the quality of care throughout the country.

In 2Q18, clinics contributed 15% of the total revenue from healthcare services, out of which 7% came from polyclinics and 8% from community clinics.

The growth in revenue from polyclinics in 2Q18 (up 45.3% y-o-y and up 7.7% q-o-q) as well as in 1H18 (up 41.8% y-o-y) has been driven by: 1) an increase in the number of polyclinics in our network (we added four new polyclinics in the last 12 months), in line with our strategy to consolidate our position as the largest player in the highly fragmented outpatient market in Georgia; and 2) an increased number of registered patients, that reached c.116,000 in 2Q18 (up from c.6,000 in 2Q17). 

Revenue from community clinics was also up y-o-y due to the introduction of new medical services. These clinics play a feeder role for the referral hospitals, so we expect their revenue growth to be slower going forward compared to the growth of referral hospital revenue.

Revenue by sources of payment

All payment sources contributed to our revenue growth. Despite the Government initiatives described above, the revenue from Government-funded healthcare programmes increased y-o-y as well as q-o-q and it remains the main contributor to our healthcare services revenues. Notwithstanding this, in line with our strategy, the share of Government financing in the healthcare services business revenue decreased to 66.3% in 1H18 from 67.9% in 1H17.

The goal to diversify our earnings is furthered by growing out-of-pocket payments by patients (up 21.2% y-o-y and up 4.8% q-o-q in 2Q18; up 23.2% y-o-y in 1H18). This is driven both by growth in the number of elective services we provide in our hospitals as well as by the enhanced footprint of our polyclinics, which are partially or fully funded out of pocket. The recent launch of Regional Hospital (the main focus of which is on providing elective care services) and the continued expansion of our polyclinics business will continue to increase the share of out-of-pocket revenue in the overall mix.

Gross profit, healthcare services business

The recent launches of hospitals naturally increased our cost base including the cost of salary and other employee benefits, cost of materials and supplies as well as cost of utilities. As these facilities are in their early roll-out phase, revenue generation lags behind the respective salary and materials expense growth. Despite this, as a result of focused efficiency initiatives, we have managed to maintain the materials rate while decreasing the direct salary rate (down 60 bps in 2Q18 y-o-y and down 20 bps in 1H18 y-o-y).

We continue to focus on the successful roll out of the newly launched hospitals and services, with the main goal to drive efficiencies across our healthcare facilities and improve our margins. As a result, we expect the direct salary rate to improve further as we complete the ramp-up phase of the newly launched healthcare facilities and services.

The healthcare services business reported gross profit of GEL 32.4 million in 2Q18 (up 14.5% y-o-y) and GEL 63.7 million in 1H18 (up 13.3% y-o-y). The gross margin in 2Q18 and 1H18 stood at 41.8% and 42.2%, respectively.

EBITDA, healthcare services business

The increase in operating expenses on a y-o-y basis is primarily driven by the expansion of the business as well as the new openings. In HY18 revenue growth outpaced operating general and administrative expense growth and by introducing cost control measures we expect further optimisation of these expenses.

We reported quarterly and half year EBITDA of GEL 18.8 million (up 2.8% y-o-y) and GEL 37.4 million (up 6.4% y-o-y), respectively. Margins remain suppressed due to the roll-out of our two new flagship hospitals and polyclinics. Another reason for the margin reduction in 2018 is the Government's UHC changes which reduced our revenue from May 2017 and that have full effect in 2018. The EBITDA margin for referral hospitals and community clinics in 2Q18 was 24.9% (26.2% in 1Q18). Excluding the dilutive effect of roll-outs, the EBITDA margin was 28.4% in 2Q18 (28.6% in 1Q18). The EBITDA margin of our polyclinics improved quarter over quarter by 260 bps and stood at 16.1% in 2Q18.

With the gradual ramp-up of the newly opened healthcare facilities we expect the healthcare services EBITDA margin to improve throughout the remainder of 2018.

Profit for the period, healthcare services business

Recent openings affected our healthcare services business profitability, as newly launched hospitals remain in their initial roll-out phase, and the accounting impact on the Group's depreciation and amortisation expense from these investments is now fully reflected in 2Q18 results. The increase in net interest expense reflects the increase in our total borrowing balance to finance planned capital expenditure. As the business has now mainly completed its investment programme, we expect only modest increases in depreciation and amortisation reflecting the completion of our Mega Lab and smaller investments in new equipment mainly in connection with the roll out of new services. Interest expense is expected to decline as we reduce our debt. Consequently, the healthcare services business' profit totalled GEL 3.6 million in 2Q18 and GEL 8.9 million 1H18.

Discussion of Pharmacy and Distribution Business Results

Income Statement, pharmacy and distribution business

Our pharmacy and distribution business had another strong quarter, posting record quarterly and half year revenues of GEL 127.3 million (up 14.8% y-o-y) and GEL 254.2 million (up 14.3% y-o-y), respectively.

The increase in y-o-y revenues from retail is attributable to the expansion of the business and the various sales initiatives that our pharmacy and distribution business continues to implement. Over the last year we have added 12 new pharmacies in our chain and the number of pharmacies in 2Q18 reached 259. Over the next few years we are projecting to have 300 pharmacies in total. Due to active marketing campaigns, promotions and other sales initiatives that our business continues to implement throughout the year, in 1H18 the number of bills issued and the average bill size increased by 5.8% and 4.5% y-o-y, respectively. This resulted in revenue growth from retail, up 12.3%. In 2Q18 seasonal promotions increased the numbers of bills issued by 7.2% y-o-y, while the average bill size was reduced by 2.3%. Overall the impact on our quarterly revenue from retail, up 9.6% y-o-y, was positive. In 1H18 the business posted strong same-store growth rate of 7.7% y-o-y and the share of para-pharmacy sales in retail revenue stood at 29.4% (28.4% in 1H17).

In 2018, in line with our strategy to grow wholesale revenue, we started to acquire new corporate accounts and actively engaged in state programmes. This resulted in the quarterly record high distribution revenue of more than GEL 34 million and y-o-y revenue growth of almost 32%.

As the largest purchaser of pharmaceuticals in Georgia, we are well-positioned in our ongoing negotiations with manufacturers for price discounts. As a result, the increase in cost of pharma favourably lags behind the respective revenue growth in all periods. Going forward, apart from continuously seeking additional manufacturer discounts, we expect margins to benefit from the introduction of higher-margin private label products at our pharmacies. We introduced private label medicines and private label personal care products are expected to follow this year.

As a result of the above, our gross profit margin has improved y-o-y, up 120 bps in 2Q18 and up 80 bps in 1H18. Gross profit reached GEL 31.5 million in 2Q18 (up 20.4% y-o-y) and GEL 62.8 million in 1H18 (up 18.2% y-o-y), respectively. 

EBITDA, pharmacy and distribution business

Business posted y-o-y positive operating leverage of 6.8 ppts and 10.6 ppts in 2Q18 and in 1H18, respectively.

Salaries and other employee benefits increased in line with the respective revenue growth, as the staff bonus motivation scheme is built around sales KPIs in our pharmacies. Another reason for the increase is the expansion of the business and the addition of new pharmacies. The increase in general and administrative expenses in 2Q18 is mainly attributable to marketing activities to support respective revenue growth.

The business reported EBITDA of GEL 11.9 in 2Q18 (up 33.6% y-o-y) and GEL 24.6 million in 1H18 (up 39.5% y-o-y). We continued to deliver strong quarterly and half year EBITDA margin, both still exceeding our "more than 8%" medium term target.

Profit for the period, pharmacy and distribution business

In 1H18 interest expense included GEL 0.6 million on the mark to market of the Pharmadepot put option, compared to GEL 0.9 million in 1H17, which is a non-cash expense.

The foreign currency gain reflects the decrease in the GEL value of US Dollar and EUR denominated payables to suppliers due to the appreciation of GEL in 2Q18.

Consequently, the pharmacy and distribution business reported a net profit of GEL 8.5 million in 2Q18 (up 78.1% y-o-y) and GEL 19.3 million (up 64.7% y-o-y).

Other operating highlights and notable developments, pharmacy and distribution business

§ In total, we operate a country-wide network of 259 pharmacies. We have 21 pharmacies located in our hospitals and clinics.

§ In 2Q18, the pharmacy and distribution business had:

§ c.2.2 million retail customer interactions per month

§ c.0.5 million loyalty card members

§ Average bill size of GEL 13.0

§ Total number of bills issued was 6.74 million

Discussion of Medical Insurance Business Results

Income Statement, medical insurance business

Since the implementation of new measures (described below) following last year's UHC changes, our medical insurance business has continued to contribute positively to the Group's EBITDA, increasing its revenue while improving the loss ratio towards its targeted level.

The medical insurance business posted GEL 13.7 million revenue in 2Q18 (up 2.2% y-o-y) and contributed GEL 0.5 million to the Group's EBITDA. In 2Q17, medical insurance business started to adjust prices or terminate loss making contracts that had become loss-making as a result of Government's changes to UHC. From 2018 the business started to attract new clients with adjusted pricing that resulted in revenue growth in 2Q18 (up 2.2% y-o-y and up 3.0% q-o-q).

Gross profit, medical insurance business

As a result of the measures described above, in 2Q18 we managed to decrease the loss ratio towards our targeted level (c.80%), down 660 bps y-o-y to 82.4%. The loss ratio improved on a quarterly basis as well, by 190 bps.

Our insurance business plays a feeder role in originating and directing patients to our healthcare facilities, mainly to polyclinics and to pharmacies. In 2Q18, our medical insurance claims expense was GEL 11.3 million, of which GEL 4.6 million (40.4% of total) was inpatient, GEL 4.4 million (39.1 % of total) was outpatient and GEL 2.3 million (20.5% of total) accounted for drugs. In 2Q18, GEL 4.3 million, or 38.1% (38.1% in 2Q17) of our total medical insurance claims were retained within the Group, of which GEL 2.8 million and GEL 1.5 million were retained in the healthcare services and pharmacy and distribution businesses, respectively. The feeder role of our medical insurance business is particularly important for the Group's outpatient services. In 2Q18, GEL 1.7 million, or 38.4% (32.6% in 2Q17), of our medical insurance claims on outpatient services were retained within the Group.

Due to the new flagship hospitals launches in Tbilisi, where our medical insurance business has the highest concentration of its insured clients, more of our medical insurance customers will be utilising our inpatient services. At the same time, with our polyclinics expansion strategy, we expect the retention rate to improve further in the future, on a larger base, providing a significant revenue boost for our healthcare services business. Our facilities are increasingly favoured by these customers over competitor facilities due to the quality and convenience of our service, access to one-stop-shop style polyclinics and the ease of claim reimbursement procedures.

The business posted gross profit of GEL 1.8 million in 2Q18 (up 160.8% y-o-y and up 28.2% q-o-q) and GEL 3.2 million in 1H18 (up 67.1% y-o-y).

Optimisation of operating expenses, mainly through re-negotiation of terms and conditions with different service providers, drove general and administrative expenses down y-o-y as well as q-o-q. Salaries and other employee benefits are also down 8.6% in 1H18.

In line with our strategy to create new revenue sources, the medical insurance business began participating in the Compulsory Motor Third Party Liability Insurance Programme, effective in the country from 1 March 2018. The profit from this is shown in other operating income.

As a result, the y-o-y expense ratio improved in 2Q18 by 340 bps and in 1H18 by 400 bps. The ratio was also improved q-o-q basis by 50 bps.

The business contributed GEL 0.5 million to EBITDA in 2Q18 and GEL 0.7 million in 1H18, compared to negative contributions in the same periods last year.

In 1Q18, the medical insurance business refinanced a foreign currency denominated loan by sourcing less expensive funding from a local commercial bank, decreasing its net interest expense as a result.

Other operating highlights and notable developments, medical insurance business

§ The number of persons insured was approximately 157,000 as of June 2018.

§ Our medical insurance market share was 27.2% based on net insurance premium revenue, as at 31 March 2018.

§ Our insurance renewal rate was 70.1% in 2Q18.

SELECTED FINANCIAL INFORMATION