Georgia Capital PLC (CGEO) Earnings Call Transcript & Summary

We are very happy to have you all here. Let me go through the agenda, what we will be talking today. Shalva, can you turn this to agenda slides. So we will start with the macro update. Nino, our Chief Economist, will give you the review of what's been happening in general macro and most of you know that macro has been doing extremely well. So Nino will talk about that. Then I will talk about the first half performance. And I will talk about as well the valuation overview -- sorry, Giorgi will talk about the valuations and overview of our portfolio companies. He will talk about liquidity and dividend outlook, and then I will do wrap up. So let's start with Nino and -- sorry, here is some key highlights before Nino kicks in with her macro presentation. So we have -- an EBITDA per share in Q2 is flat, it's up 0.2%. But actually, if you look at the post-Q2 events where you had a big appreciation of lari continue to appreciate in Bank of Georgia. Share price being repriced pretty aggressively. We are actually up 4.4% since the end of the quarter. NAV per share in pound terms is all-time high at 16.8%. This is due to the adjustments for Bank of Georgia share price as well as strengthening lari and I guess weakening of the pound as well. But at this stage, we are at a record high NAV per share in terms of the standing. So our -- and other key metrics, which we started to observe out at our Investor Day in May this year is our net NCC ratio, what we call is net capital commitment, and that's kind of -- has also been improving since March -- first time we disclosed that ratio. It was 27% -- sorry, it was 28%, end of the Q2 ended up at 27%. However, again, the events after the Q2, namely the lari appreciation and Bank of Georgia share price across this NCC ratio came down to 23.5%. And we are getting closer to our 15% over-the-cycle target. Third point, what we have, we have a very strong dividend inflows, we are expecting close to GEL 100 million dividend inflows and this doesn't count the Bank of Georgia buybacks, which basically is capital return. But we are looking at cash-on-cash basis, what cash we received as the investors in Bank of Georgia and other portfolio companies, so we are expecting around GEL 100 million inflow in 2022. Also, that we are continuing with our buyback program. We had a stronger momentum. We bought back around 6% of issued capital, and we canceled it now outstanding number of shares came down to 45.1 million shares which we have fairly accrued. So let's go to the macro presentation, and Nino will explain what's happening in Georgian macro.

So hello, everyone. As usual, I will do a brief macroeconomic overview of our country. So we will highlight the key trends, we believe, is interesting and important for you. So world is still facing the puzzling economy with lots of uncertainties as the global economy is grappling with 1 semi-centric pandemic and its economic aftershocks. We are also facing the biggest war in Europe since 1945 and 40-year high inflation and biggest rate hikes since the 1994 in U.S. Despite these uncertainties, increase the risk of recession and also the noise around the world, Georgian economy is doing amazingly well as real GDP growth increased by 10.5% according to the preliminary estimates in the first half of 2022, followed by 10.4% growth in 2021. So the double-digit growth is mostly driven by domestic and external factors. From the external factors, we should emphasize migration impact as high skilled labor coming from mainly Russia, Ukraine and Belarus are aiding our economic activity and the FX flows. The migration impact is partially reflected in our remittances and tourist revenue numbers. Remittances are up by 65% in the first half compared to the last year. Export growth was more than 35% in the first half and July number is expected to be even higher and tourist revenues is almost recovered to 2019 levels in May and June. From the domestic side, the credit expansion is worth to mention is the loan growth was 18.7% as of June, if we exclude the exchange rate and we observed that activity is quite significant, both in business and retail sector and also activity is quite reasonable, both in national currency and foreign currency loans. From the fiscal side, which has also affected the economic activity despite the moderation of fiscal starts, we still see the increase in current and capital expenditure. But of course, the revenue side was exceptionally high, and we expect fiscal deficit to come down in the coming years. So this -- this was the kind of external and domestic factors which are affecting growth, and we should also measure consumer and business sentiment and negative real rates, which are helping spending and investment decisions. So overall, we expect more than 10 billion to be added to our nominal GDP and nominal GDP is expected to exceed 70 billion in 2022. In dollar terms, we expect nominal GDP to exceed $25 billion, of course, depending on the exchange rate movement and this exceptional high growth of nominal GDP both in GEL and USD terms are driven by double-digit real growth as well as inflation and significant depreciation of Georgian GEL. On the next slide, we are showing the very favorable trend of our currency. So you can see that is GEL is at the pre-COVID level now. So GEL appreciated by more than 14% against the U.S. dollars this year. And despite the fact that the U.S. dollar strengthened on the back of hawkish Fed as well as increased risk coverage towards the risky assets. So dollar index increased by 10% this year and by more than 70% compared to 2001. But on the contrary, GEL performed quite well on the back of kind of we have some structural changes in our FX inflows. Again, migration impact is significant, which is reflected in -- partially reflected in our remittances. Our remittances is up by 65%, mostly it is related to the remittances coming from Russia. And we believe that this is more income type cash flow rather than a transfer as Russian migrants are transferring their income from Russia to Georgia. And we have, again, this continued robust performance of expert and recovering tourism revenues. So these are the key factors from the external side, and we should also mention foreign direct investment, which increased more than 4x in the first quarter of 2022 and exit $0.5 billion in the first quarter. From the domestic side, the appreciation was supported by tight monetary policy National Bank of Georgia started to tighten the rate since March 2021 and increased the rate by 300 basis points and economic activity and tight monetary policy as well as significant interest rate differential, aided FX lending and FX lending is the one aiding exchange rate depreciation from the domestic side. In the next slide, we have kind of more details about the FX inflows. So net external earnings turned positive in Q2, which is -- so this net external earnings is kind of proxy for our current account. So this is the frequent indicators. So we are showing trade money transfers and tourism revenues. So it turned positive. And despite the fact that import accelerated significantly on the back of economic activity as well as increasing prices on the international market. This accelerated import was quite nicely compensated by rebounding exports, very significant surge of remittances as well as recovering tourist revenue numbers. So you can see in the chart, the significant jump from remittances. So on average, we are receiving around USD 200 million remittances on a monthly basis and it jumps -- the surge of remittances is mostly attributable to transfers from Russia, which is related to the russian immigrants, who are transferring their income from Russia to Georgia and also there is some portion of Georgian immigrants who are trying to take out the capital from Russia. So export and import do have very favorable trend and there were significant growth numbers, mostly related to the increasing prices. But terms of trading improved significantly, which means that our exporting goods are increasing in prices faster compared to the importing goods and the improving terms of trade, helping foreign exchange rate and current account and economic activity in the short term. As for the tourist revenues, so you can see that the tourism revenues almost recovered to 2019 levels, but we do still have significant upside in terms of tourism revenues as looking at the number of travelers, the number of travelers only recovered to the half of the levels we have observed in 2019 year. So in the next slide, we are showing the dynamics of inflation. So as you know, the inflation is a common headache for the countries around the world, and according to the World Bank, 100% of advanced economies are experiencing above the target inflation and 90% of inflation targeting emerging markets and the developing economies are experiencing above the target inflation. And the drivers for inflation is quite similar for Georgia also. The key drivers was international food and commodity prices on the international market. So imported inflation was the kind of most significant factor for the development in the first half of 2022. So we see and expect inflation to kind of start to cool down in the second half of 2022 on the -- mainly due to the base effect as well as lowering prices on the commodities and reducing prices for this and reducing shipping costs. But we still think that inflation will or average inflation will be double digit in 2022 and we expect National Bank of Georgia to remain tight until the inflation expectations will be curved. So monetary policy was quite appropriate, NBG started to tighten from March 2021 and increased the rate to 11% and now they have added some macro prudential instruments according to their estimates the GDP gap is positive, which means that despite the supply side pressures and imported inflation, due to the fact that we have higher than expected economic growth and significant rebound of economic activity. So NBG estimates that gap is positive, which means that we do have pressure on inflation from the domestic side. That's why we expect National Bank of Georgia to remain tight for some time, and they have also introduced some macro prudential measures in order to the inflation expectations. So also due to the fact that we had significant depreciation of GEL. So this was quite favorable time for National Bank of Georgia to increase the reserves and even further improve our external balance sheet. So on the direct intervention National Bank of Georgia brought some USD 80 million. And through the Wematch platform, they have bought more than USD 150 million. And this, of course, was quite favorable timing and they have increased the reserves to EUR 4.1 billion, which is 7.3% higher compared to the last year. On the fiscal side, so we have -- so as you know, there is significant -- we had expansionary fiscal policy since the pandemic and as it was expected, fiscal policies starts start to moderate, right. So we had exceptional increase in our tax revenues on the back of like double-digit growth of our economy. And while the current and capital expenditure increased almost single digits due to the fact that -- so government is committed to return the fiscal deficit to the fiscal bonds and fiscal deficit is expected to be below 3% in 2023. Due to the fact that we had double-digit growth in 2021 -- in 2021, and we have favorable trend of exchange rate. The debt level reduced significantly, and it is expected to reduce further, especially on the back of double-digit growth we are observing this year also. And before I end my presentation, I want also to highlight 2 facts, the fitch affirmed -- Europe central fitch affirmed Georgian rating at BB with stable outlook. And they highlighted this macroeconomic framework as well as rebounding economic activity and improving external balance sheet. And also IMF approved EUR 280 million standby arrangement, which is currently treated as precautionary measure, but it is very important for Georgia as it's further reduce our liquidity risk. So this was a very brief overview. Now I will hand over to Irakli to speak -- to talk about the Q2 and first half performance. Thank you.

Thanks, Nino. We will take questions, and you can send us by the chat or you can just raise your hand and ask the questions towards the end. So let me talk about the aggregate portfolio performance. As you see in Q2, we are up in aggregate revenue by nearly 5% and nearly 15%, we are up over the Q2 2020. We are also first half basis, we are up nearly more than 9% in the first half to GEL 905 million, and we are up 36% over the year over the year. Actually, the growth is mixed between the large portfolio companies investment stage and other portfolio companies. But as you can see that other portfolio companies contributed to big growth as well in the revenue. Going on the next slide, looking at the EBITDA performance, you see the EBITDA is down 20% in Q2 Q-over-Q and 36% is up respectively against 2020. The main driver for the EBITDA to be down is threefold: one is the pharmacies prices are in dollars as we are importing the drugs from abroad. So we had the margins squeezed there because of the lari appreciation. Secondly, hospitals are coming out of the COVID and we need to get into the optimal capacity level from the scratch. So we are doing that. And actually, every month, we are improving and the occupancy levels are growing. So we are happy with the performance. But in Q2, you see in March basically the regards the contract stock with the government on COVID side so March, April, May, June. We've been actually loading our hospitals from 0 and -- some of the hospitals, basically from 0 occupancy. And now in July and actually in August, we are getting into the optimal level where we were actually prior time, but here in Q2, you don't see that. And third one is basically the -- our wine business which has suffered significantly due to the Russia, Ukraine war. We were exporting both in Ukraine war, a large [indiscernible] supporters actually in Ukraine of wine and also the Russian got also hit in Q2. However, Q3 is getting -- we have a nice turnaround. So we are optimistic about the growth. So first half numbers is also you see same reason, down 12%. EBITDA to GEL 117 million basically, but up 30% against 2020. So if we go to next slide, we have a slide. On operating income, you see the operating income in the first half is up 12.2% operating -- sorry, operating cash flow and in Q2 is down around 9% and also our cash level of our portfolio companies is around $100 million. Let's go to the next slide. Now NAV per share performance. you see a pre-COVID times where we're around GEL 46.8. Now it being substantial that we have marked the time when COVID hit the streets. But basically, then we had a nice growth. And you see that it is actually in gray where we also marked it down as we increased our cost of equities when we have valued our portfolio companies. You see in end of first half, we ended up with GEL 52.7 per share. But since then, the NAV per share increased around 4.5% on the back of the growth of the Bank of Georgia share price as well as Lari appreciation. So basically, mark-to-market, that's where we are around GEL 55 per share. And it's up nearly more than 17% comparing to pre-COVID levels. So if we go to the next slide, please. So if you look at the movement in Q2, what has happened, it was down 5% due to the EBITDA performance that we have showed. But then again, we had the improvement in multiples in Q2 and basically nearly canceled each other out. But overall, you see that pie base contributed positively at 1.5% and observable portfolio lists the observable portfolio contributed nearly 1% positively. And then you see the movement from GEL 52.6 end of the March to GEL 52.7. And then, as I mentioned before, it has grown further to GEL 55 which is actually GBP 16.8 , basically the British pound, which is also a record high. Can you go to the next slide. So here is the performance of the buybacks. You see that buybacks have -- We have bought around 2.8 million shares, around 6% of issued capital. And you see that we have decreased our share count from 40 -- nearly 48 million shares we had in the peak end of the December 2020 when we issued shares for the acquisition of GAG shares. And then basically, we are at 45.1 million issued share -- issued number of shares, basically. It would be nice to get back to the de-merger levels where it was below 40 million. So let's go to the next slide, please. Here is the net capital commitment, our one of the key strategic priorities to decrease towards the 15% level. And you see that we went down in March. It was 28.2%. That's the first time when we have published this ratio and you know that let me remind you that the ratio includes the net debt. It also includes the guaranteed, and this also includes the planned investments what we are planning to make. So all type of capital commitments, what we know today, and plus we are also assigning $50 million of the liquidity buffer to this ratio. And then basically, the -- as you see, the net debt plus the planned investment and the buffer is around $250 million -- was $250 million in March 2022, and we are dividing that number by portfolio value and in March, it was 28.2%, and our target is to go down to 15% to have less leverage, of course, direct leverage of debt, but also commitments included here in terms of the investments. So the 28% went down to 27% in June in 2022, but it went further down to 23.5% after the June event. So pro forma June looks very promising at 23.5%, which basically 2 things contributed here, guarantees, which the government has issued in favor of the -- our brewers been decreasing significantly, and we expect in the next 12 months to go to 0 as the beer business is performing extremely well, and we don't expect to have a guarantee outstanding in next 12 monts, if it continues to perform, and we think that it will continue to perform well. So that's kind of a change here. And another change is the portfolio value, which has been increased significantly since Bank of Georgia share price increased and as well as lari appreciated. You see a portfolio volume increased by nearly $100 million after the June 30. So that's 2 factors which influence the lowering the NCC ratio to 23.5%. Now looking at the kind of dynamics where we were. So with December 2019, this ratio was around 42.5%. And you see we are moving down to -- we have been decreasing significantly over the period of time. And you see also that we are not now too far away from our targeted 15%, which is throughout the cycle target what we have. So let me highlight the leverage between our portfolio companies. The pharmacies leverage on the changed percentage decreased to 1.6x. EBITDA hospitals increased a little bit because of the EBITDA hit in Q2, and it's around 2.5x debt-to-EBITDA. Our target there is to decrease 2.5% towards 2%. Renewable energy has decreased a little bit to 8x. Education has decreased from 1.4% to 1%. And here in education, as you know, we are investing and we expect to grow both investment and the leverage. Going forward, clinics and diagnostics has grown from 2% to 2.8%. This is, again, because of the COVID testing has been stopped as well as outpatient clinics will serve the COVID patients, we are actually rebooting the whole system. So on the first half portfolio results and valuation overview, I will hand over to Giorgi, and he is well placed to walk you through about this -- through the valuations.

Thank you, Irakli. Hello, everyone. Let me walk you through the valuations. Three things I would highlight on this slide is, as you know, we announced at the Investor Day that we will be hiring the external valuation firm, the same one that values our large portfolio companies to also value the private investment portfolio stage companies. That has happened at the end of the first half and the external independent valuation firm valued all private portfolio companies and the private investment stage portfolio companies. When we combine that with the Bank of Georgia that has an observable price in London Stock Exchange and the water utility where we have an agreed exit route through the put call option structure. 90% of our portfolio is now externally valued. I would highlight that as part of the valuations in the first half, more in the second quarter, we saw that the discount rates went up again by 50 bps to 100 bps, but we saw that the discount rates also stabilized at the end of the first half. You may recall in the first quarter, discount rates went up by around 200 bps. We are also seeing that subsequent to the end of the first half, discount rates actually improved following the stabilization as we saw the -- and as you saw on the global markets, the share prices have rallied a little bit over the last few weeks. Lastly, I will highlight that this was the first time we actually valued our put and call option structure of our water utility business. So the 20% was valued by looking at the exit route in this business. And we will talk about what that valuation translated into, but generally, water utility business had a very strong first half. So it was a valuation gain that we recorded in this business? With that, if we go to the next slide, we will see that our portfolio value increased by GEL 100 million approximately during the second quarter. The key contributors here were that when we look at the listed and observable portfolio, it increased by $90 million because of the Bank of Georgia share price increase and the gain that we had in the water utility business revaluation, but it then decreased by GEL 23 million because we accrued dividends on Bank of project given that their ex-dividend date was the last day of June. We had around 1.6% decrease in the private portfolio companies because of the negative value creations in the large portfolio companies and in other portfolio companies predominantly. But then the growth of 5.5% because of the conversion of the loans that we had issued to our beverages and the real estate businesses that we had discussed and announced at the Investor Day as well. So we finished the quarter with GEL 2.7 billion value of our portfolio. On the next slide, you see how this GEL 2.7 billion is actually spread out and I'll spend a few minutes on this slide. We have around 23% at the end of the quarter coming out from the listed and the observable businesses, where Bank of Georgia is around GEL 456 million. It was valued at GBP 13 at around, at the end of June. Since then, as you know, it has rallied and the price has increased. The option valuation that we applied for the water utility business meant that we recorded around GEL 14 million gain in this business. So it went up for GEL 139 million, which we had at the end of first quarter to GEL 153 million at the end of the first half. When we look at the large portfolio companies, they combine around -- or they make up around 51% of our entire portfolio where the largest business is the retail pharmacy business with GEL 671 million, followed by hospitals at GEL 478 million and the insurance businesses, both P&C and Medical at GEL 240 million. We have the investment stage portfolio businesses that make up around GEL 444 million in total, and it's 16% of our entire portfolio. And then the other businesses, which are approximately 10% of the overall portfolio. Over the next few slides, we will look at the performance of large and the investment stage portfolio companies and how this performance translated into the various valuations. Retail pharmacy, as was said earlier, the recalibration of the price is due to the exchange rate depreciation. If we look at year-to-date, Lari has appreciated actually more than or close to 15%, 15. It's one of the strongest currencies that is observed in emerging markets and the frontier markets. So that meant for a business like retail pharmacy, which is also a dollar related business in this case because they import products. They had to recalibrate their prices and that price recalibration in the second quarter meant that the revenues were slightly down because of this recalibration translated into the price deflation. However, we are seeing the strong momentum in this business and the EBITDA growth that you see here, 11%, that was also impacted by a higher base EBITDA last year because of the existence of the government subsidy on financing the certain income taxes. So for the personal income taxes that -- where we had the benefit last year, that was not the case again this year. So that meant the slightly lower EBITDA. However, when we look at the valuations with the strong momentum and the outlook for this business, not much has changed in terms of the enterprise value multiple increased only slightly. And because we bought out the minority shareholders in this business, we bought out 10% already in the first half. So our ownership here went from 67% to 77%, that meant that the value of the minority interest went down to 85 by 22%. And accordingly, the net debt increased because the cash left the business. So the value of this business was not materially changed from the first quarter. It was GEL 671 million. In the hospitals, as it was discussed earlier, the termination of the COVID contract with the government in March meant that the second quarter. We started with a lower base. So April was the lowest base, but we saw then in May and June, significant improvements over the previous months. So the revenues were down accordingly by 10% and the EBITDA was down higher at 33%. But as we said earlier, we expect that this business will continue to recover as non-COVID hospitals become available for General Republic and as their utilization rates continue to grow. In terms of the valuations, this meant that the enterprise value went down in this business by around 8%. However, we had still good operating cash collection in this business. And then overall, the equity value was down by 9% to GEL 478 million, given the drop in the LTM EBITDA, which went down by around GEL 7 million, the EBITDA multiple increased here only slightly from 10.3x to 10.5x. In the insurance business, we had an extremely strong performance by the P&C insurance business, where we are seeing the growth actually coming from the retail space and the SMEs show the growth of the issued or written premiums in that lines continue to grow. That has been driving the growth of the revenues by double digits. On a combined basis, when we look at P&C and medical insurance, the growth was 9% in the second quarter. We had also a strong growth in the bottom line. The P&C's bottom line increased also by double digits. But on a combined basis, it was the 9% growth. I would highlight that in the P&C business, actually, we had a very strong quarter when it comes to the combined ratio. Our combined ratio was less than 80% in the second quarter, an improvement compared to the previous year. In the valuation, the strong performance, and we present here, the P&C valuation translated into strong growth as well and the value -- equity value of the P&C business was up by 8%, notwithstanding that during the quarter, they paid around GEL 7.5 million dividends to us, to Georgia Capital. Now switching to the investment stage businesses and starting with the renewable energy, which also had a very strong quarter. And one difference that we, as a management here, look at is we look at the average in dollar terms, and I know here we present in lari's, but it is a very dollar business. The pricing of the energy sales is determined in dollar terms and most of the expenses are denominated in dollars. So if we look at this business in dollar terms, actually, both revenue and EBITDA were up. The decrease in lari terms was because the exchange rate depreciated. So when we compare a year ago, exchange rate was higher. So revenue increased by 2% and the EBITDA was up by 4.4%. What we are observing in this business generally as well as the average sales prices are growing in Georgia, not within our business, but also in the market, they are up by double digit when we compare them against last year, and this business also paid us around GEL 4 million dividends in the first half. On the valuation-wise, again, there is a mismatch because of the currency. So even though enterprise value was down by 1.5%, when we look at this in dollar terms, in dollar terms, it was actually up by high single digits. So equity value-wise, which is up by 5%. When we look at it in dollar terms, again, in dollar terms, it was a much better performance for this business as it is a dollar-denominated business. Next, we have the education business, which had a very strong quarter. You see the -- revenues were up by close to 29%. We see that the EBITDA was up by 20%. We have -- we are also seeing a very strong momentum in this business as they have exited given the fading COVID impact. So if they are exiting the COVID, we are seeing that the intake for the new classes for the first graders that is starting from September this year is record high. We are seeing that the number of learners that we're expecting and budgeting is actually being exited. So that means that when we look at the outlook for this business or we have already added, for example, 2,000 new capacity of learners at last year, that is being filled up as we go. So that means that in terms of the valuations, it's adding to strong growth momentum and the value of this business increased. If we go to the next slide, the value of this business increased by 25%, and that's largely because of the strong intakes with actually increased prices are driving the revenue growth. So on an LTM basis, while the multiple increased from 12x to 15.3x, when we take into account the future earnings, so if you look at the forward-looking multiple, it actually decreased from 12x to 11x when is taking into account this future revenues that we expect to kick in from the growth of our capacity. Then if we go to the next slide, the clinics and diagnostic similar reasons for the revenue decrease as the core is fading their way and the termination of the contracts impacted the revenues and the EBITDA, which in terms of the valuation translated into lower value as well that you see on the next slide here. If we go to the next slide, yes, here. So 8% enterprise value was down and around a 19% decrease in the equity value and the combined multiple went up from 9x to 9.8x on the back of around 15% decrease in the LTM EBITDA for the combined business. I will now switch to the liquidity and the dividend income outlook. So our liquidity remains very strong. At the end of the second quarter, we had $234 million worth of liquidity, which is almost equally split between the marketable securities where we invest to generate yield and the cash that's sitting at bank of $123 million. Coverage During the first half, we had both Moody's and S&P review, Georgia Capital's creditworthiness and the rating. Both A-grading rating agencies increased our rating by 1 notch and now we have B1 and B+ from S&P, which are comparable ratings if we compared it to the rating agencies. Our dividend income outlook remains very strong again. This year, we expect between GEL 90 million to GEL 100 million dividend. To date, we have collected in aggregate close to GEL 40 million dividends. And in the second half, we expect between GEL 55 million to GEL 66 million dividends to arrive at Georgia Capital. With that, I will hand it back over to Irakli for the wrap-up section.

Thanks, Giorgi. So to wrap up, basically, we have the NAV per share post -- considering post Q2, we have a 4% increase in Q2, we have -- due to the appreciation of Bank of Georgia share price and FX strengths of the lari, we are at all-time record height NAV per share, GBP 60.8. Our NCC ratio is down to 23.5%, and we have a positive momentum towards our 15% mark Dividend income is strong, one of the strongest year we're going to have this year with 100 million -- close to GEL 100 million of dividends to be received. Buyback program continues. We have done 6%. We bought back of the company, and we will continue to do so. there will be also the share buybacks for management trust going forward. Also, if you look at the macro outlook, we have a very strong macro with 10% -- more than 10% growth in the first half after double-digit growth of last year. So basically, base is not low at all. So on a high base, we are growing even stronger in double digits. And basically, if you look at the nominal GDP of the country, it reached $25 billion where 3 years or 4 years ago, it was around $15 billion to $16 billion. So it's a big growth in nominal GDP in terms of -- in dollar terms. We had a significant -- we have a very significant value creation potential as GDP is growing. As you see, the Q2 was flattish because of the -- the COVID has stopped our kind of -- I mean the discontinuing of the COVID revenues, it stopped the gross and actually it declined a little bit, but we are cutting back through our capacity utilization both in hospitals and the polyclinics and we are targeting to have a positive development in Q2 and Q3 -- sorry, in Q3 and Q4. Here, I will stop and I will move to the Q&A session. And Shalva, maybe you would give us the lead on some questions.

[Operator Instructions] I see we already have James Bannan, who wants to ask a question.

Yes. And congrats on the numbers. I've got 2 questions. First is on the macro side, maybe a bit abstract, but obviously, a fantastic first half of the year. and continuing from the second quarter, a lot of positive developments, I guess, from Russia shutting down. I've read here recently on various news channels that people are worried now that Georgia might be getting used as a way to circumvent the sanctions on Russia. I don't know what you're saying or how, I guess, Georgia is mitigating those risks, I guess, particularly Bank of Georgia might be the suspect here, but I'd be interested to get your view on. And then the second question is on the buyback program. And on the one hand, I know you want to reduce debt, but I guess a lot of that is the operating company level on the hospitals on the renewable income. You do have a lot of cash, but -- and then on the other hand, we're talking about a NAV discount in excess of 60% and that's still based on a very conservative Bank of Georgia valuation. So I'm just wondering why we don't really push the boat out on the buyback program. I know there's liquidity constraints, but there are other options around. But so I'd like to get your thinking on the buyback because I mean it's a bit ridiculous at the moment, I guess.

Yes. Thanks, James. So basically, to start from the first question, I mean, the Georgia is making sure that sanctions are not avoided and I think it is doing everything including National Bank and the banks and the government in general. We've been always a very good partner to divest to U.S. and EU and continue so. So we don't see a problem there, to be honest. I think there is just talk, but there is not any real evidence of that happening. And actually, I highly doubt it would happen personally because I think that it's kind of a very obvious whatever the Georgia stance. So on the second point, I hear you, I think that it's very -- we have in excess of 60% discount valuations. We are doing some buybacks, as you know, not -- I agree with you, maybe it's not enough. We need to balance between the debt at holdco level. What we have, we have against the gross debt, we have $365 million of the euro bond what we have issued. Issued the euro bond and we have a cash offsetting some of it, and now our net debt is around $130 million or so. So basically, we have -- and we think that this debt which prevents the shareholders of accessing the cash generation of our portfolio companies, I think that removing it would be as effective as buybacks basically because I think that would remove a big barrier which we have between shareholders and the operating company cash flows. So we are -- we set ourselves a target of 15% of this net capital commitment, what we have communicated in our Investor Day, and we are moving towards that as we will move towards that, we would be happy to consider of stepping up the buybacks.

Okay. Yes. Okay. So you want to buy back some of that Eurobond or paid some of it down before you increase the buyback or whatever dividend.

Yes. So basically, the way we explain [indiscernible] is basically when we're below 50%, we would be very bullish on buybacks. As we are away from 50%, now we are at around 23.5%, we would do tactical buybacks, but we will not be -- we will not be very bullish in doing the big ticket sizes. So basically, as we are decreasing this NCC ratio, we'll be increasing the buyback amount. That's kind of our -- it's kind of a volume bottom, which we have introduced which would guide you where our appetite of the buybacks is.

We have several questions in the Q&A. We have a question from Fire Bird, Russians and Ukrainians who have come to Georgia because of the war are considered adding to the tourist revenues?

Basically, no, it's not considered as a tourist revenue. These are the -- it's also a very strange way to -- actually, we don't know exactly how the Georgia counts, but we know that they are not counting the tourist revenue. Now when we talked about the remittances increase, it's not the remittance, it's not like Georgians who work abroad are sending money back. It's actually the Russians who work in Georgia, but receives their income in Russia because they are mostly -- they are IT specialists who are doing their work out of Georgia, but they receive their income in Russia and then the remit to Georgia. So it's actually -- it's not the remittances per se. It is remittances on the book, but in reality, it's service export, what Georgia is doing. So basically, we imported the workforce which is -- which are the IT specialists, who are IT specialists, and we did not have these IT specialists. As you know, Georgia are not very good in numbers. They are very good in plans and painting the pictures and so on and so on, on creative stuff. So we certainly have a workforce which is doing the IT development. We imported that workforce and then they are bringing in the dollar revenue by exporting the services. So now in numbers, this is between, anywhere between 65,000 and 120,000 people. We don't exactly know how many of those are, but that's kind of a range what we have -- on average, they make $50,000 a year income. So if we count that even 50,000 are doing that, it's a $2.5 billion of income for Georgia, which is very significant, is like 10% of our GDP. It's a very significant number. So basically, structure of Georgian economy has changed significantly and labor force changed significantly. So our potential GDP growth also changed significantly. So we don't know exactly how it is counted. But what we know that we have a huge dollar income is appearing on our balance sheet plus. Logistics income is also -- will increase its increasing -- a good increase in Central Asia is diversifying its export routes through Azerbaijan and Georgia, so -- and we see some -- already some of the moments there. Anyway, there's a big, big changes. We are seeing also the -- due to the war, for instance, we now started to export the Heineken beer in 7 countries because the Heineken closed down and Heineken operations in Russia. So now that we have the license to export it. So there's a lot of changes happening. And that changes are going to be mostly very, very, very positive. And that's, hence, the double-digit growth of the economy on top of last year, double-digit growth. So our in-house view is close to 10%, 10% plus growth for this year for -- of Georgian GDP.

Thanks, Irakli. So the next question is from Steven Gorelik, he's asking, where are rest of 2022 dividends expected to come from? Is this from operating income generated by subsidiaries or sale of assets. And there is another one, are you taking into account the expected proceeds from the sale of remaining 20% of water utility? If not, why not?

So basically, you have -- we count dividends only on a operating company's income as a dividend. So we don't count dividend income due to the sale of the assets. And this Giorgi, maybe you say more details how the GEL 100 million is broken down.

Sure. So what we expect in the second half is 55 to 65 that I highlighted earlier, that will be a combination of the dividends from GHG, which is hospitals and the pharmacy businesses, plus it will be from the insurance business, the P&C insurance business, where we expect the second tranche of the dividend in the first half, they paid by GEL 7.5 million. And additionally, Bank of Georgia's interim dividends that we also expect to come in the second half. So that's primarily these 4 drivers of that -- of the dividends that we expect in the second half. I think I can also answer the second part of the question, so that water utility proceeds, Steve, what we look at is in the NCC ratio, what are you -- the value of the 20% is included already in the denominator. We don't include it as a cash-like item, the 20% because it's not yet cashed out. We look at it as part of the portfolio. So it's included in the portfolio value, and that's how it participates in the NCS ratio calculation.

The next question is, which factors are contributing to the pharmacies inability to fully pass on cost increases related to lari appreciation.

I think that this appreciation is happening very fast, so we cannot really reprice that fast. So over time, it will reflect, but not immediately.

The next question is from Milosz. Do you see room for hospitals business to return to the pre-COVID EBITDA margins as bed occupancy increases?

Absolutely. We think maybe even Q4, we would get into the pre-COVID EBITDA margin level. We are Q4 maybe. Next year, for sure, we think that we will get there, but I think that we can even get through Q4 to pre-COVID EBITDA margin level.

There is a question about the healthcare services, what are your views about recent initiatives, regulation in the sector regarding minimum salaries for hospital workers of UHC participating hospitals. And what are you planning to do with Evex bond refinancing this year? And will it be a public offering?

We're still on the first side of the question, we still need to see exactly what it is. So it's -- there are a lot of talks on different reforms, but we need to understand better. I think it's too early to discuss it. On the second point -- sorry, what was the second question?

Second question about the Evex bond refinancing in this year? and it will be a public offering?.

Giorgi, maybe you answer it. I don't know that else, but it's a small bond.

Yes, this is a small one. So to the best of my knowledge, it's not the public offering, it will be a combination of IFIs and the local banks. So no, there won't be a public offering to the extent we know.

There is another one. "Are there any news about the construction of power plants, which are in your pipeline? And when are they expected to be constructed?"

We are -- as you may know, we are expecting the U.S. government to sign the PPA until then. I think it's very difficult to say when we're going to construct without PPA, we will obviously will not construct. So we do have in our NCC calculations, the committed capital for the construction. But at the same time, we do not have signed PPA to construct it. So let's see -- I think I hope that this year, we will have a final decision by the government to sign the PPA and go forward with that.

Thank you. There is actually a comment from Jonathan [indiscernible]. Congratulations once again on the delivery by the management team. These other questions would be an opinion from a shareholder. As a shareholder, I applaud the valuable program, it's a sensible use of cash, but clearly, the market is not currently, over the receptive to election as such was its work continuing. I do hope that management continues to prioritize developing the existing businesses. or indeed adding the operations should the opportunity present. You know your discount for what is worth. I personally am happy for you to add to the operations bearing this in mind.

Thanks, Jonathan. I appreciate your comment. Any more questions? Since there are no more questions, let me thank you once again for your commitment and for you -- for attending our Investor Day, and we hope to see you soon. Here's another fire bird question. Can you discuss your transition. We will update you on that. We don't have anything new, whatever we said in the recent press release on the CEO transition. That is pretty much it, and we will update you in due course. We will -- we hope to have more news towards the end of the year. However, we are working very hard on all fronts. So we are happy with the management, that's what we have and the upcoming senior executives in our team. So we'll keep you updated on that. Thank you again, and hope to see you soon on the orders, which are now back on the agenda. Bye-bye.