Georgia Capital PLC (CGEO) Earnings Call Transcript & Summary

Hello, everybody. Thanks for joining our Q1 results call. Let me outline our agenda for today, and then I will move about Q&A after we do the presentation. So the presentation is, we'll start with the key developments, and I'll talk about that. [indiscernible] update for Georgia will be done by our Chief Economist, Nino Vakhvakhishvili Q1 performance overview will be done by me as well as the -- and then we will have Giorgi Alpaidze, our CFO, talking about the valuations of our portfolio company, liquidity outlook and dividend outlook. In the end, we'll do a wrap up. And as I mentioned, we will do the Q&A session out of that. So in terms of key developments, we have a record high NAV per share, which reached GEL 90, which is up 8.6% Q-over-Q, and this is driven mainly by BoG's outstanding performance. However, we had a very good result for our portfolio companies. we had our EBITDA year-over-year ago by 17.3%. This is an aggregate EBITDA of our portfolio companies. Revenue grew nearly 9% during this Q-over-Q. So happy with the performance. The other point, the key development is that our NCC ratio continued to decline as a result of the portfolio growth -- it's now below 15%. I think that's the first time in our history. We also did very well in terms of repurchasing the shares. We nearly bought back 0.5 million shares in Q1, which is -- and in total, we have a strong track record of buybacks, nearly 8 million shares we bought in the lifetime of [indiscernible], 6 years we are -- our history is a 6-year history and that basically showed us it gives you a good demonstration how committed we are in the buyback. So in total, we spent nearly $90 million in buybacks which is around 16.5% of our issued share capital. So we will continue to do the buybacks in line with our capital allocation strategy. In Q1, we also had a strong dividend inflows for the Q1 result for the Q1, as you know, is not very active in terms of dividends. So nearly GEL 40 million being dividends we received in Q1. Let me ask Nino to talk about the macroeconomic update. And then I will talk about the Q1 performance.

Thank you, Alpaidze. Hello, everyone, and thank you for joining our webinar today. So as usual, I will do a very quick macroeconomic update of Georgia and we will answer your questions during our Q&A session if you have any. Georgian economy continued to expand. And in the first quarter. So you remember, we had this two year of double-digit growth, and we had this high single-digit 7.5% growth last year. And according to the preliminary estimates, the first Q1 growth came at 7.8%, which is above the expectations. And also, if you look at the overall economy like in nominal GDP in U.S. dollar almost nearly doubling over the 3-year span. I [indiscernible] the revisions done by [indiscernible] our national accounts. So if I started to provide our outlook upwards. While the medium-term outlook is remaining the same as Georgia is one of the top performers in terms of GDP growth and is expected to be so in the medium term. On the inflation side, we had sharp disinflation during the 2023 and according to the latest number headline inflation is 0.5% versus the 3% deflation target in National Bank of Georgia started exiting from tightened monetary policy last year, and it continues doing so. The latest number of our financing rate is 8.25%. So National Bank of Georgia did 125 basis point cut during the first quarter. On the next slide, we are showing the significant improvement in our external balance sheet in terms of current accounts. So we had current account deficit significantly last year. So after widening during the COVID times. And we often say that current account deficit is -- we are not worried about current account deficit whenever it is financed by the foreign direct investments. And so even during last 2 years, foreign direct investments even exceeded the current account deficit. In 2022, current account trade negative trade balance was partially financed mostly by the transfers, while last year, it was mainly driven by the service sector when tourist revenues as well as IT service contributed positively to the narrowing of current account deficit. There was lots of question regarding the Russian FX inflow. So we see FX inflows to moderate and we see that the share of Russia in total fixing was to return to prior levels. In terms of total inflows, we see some moderation in the first quarter, but -- so last year, it was the exceptional year. So excluding last year both is still very strong and stated historic heights if we exclude last year first quarter. This strong FX inflows as well as the economic activity and the strong FX liquidity led the currency to be quite stable. So we had a sharp appreciation and after the -- from the second half of last year, [indiscernible] remains quite stable. On the next slide, we are showing also unemployment, which is, again, at its historic low at 15.3% as of first quarter of 2023, and the strong labor market suffered also domestic economic activity, and it is interesting also to see that. So we are looking at the first quarter growth. So last year, and in 2022, we were telling that this growth is driven by external and internal factors and mostly the external factors were the significant contributor to the growth as we had like surging FX inflows. And this year, we are that FX inflows are moderating, but we see domestic component to be quite strong, while we see loan growth to be at the 20% if we include exchange rate and if we exclude the exchange rate is 70%, and we see also fiscal expenditure to be higher compared to last year. So domestic component of the growth is contributing significantly to our economic growth. On the next slide, we kind of want to show up the summary of the policy stance and we think that policy stance is appropriate. So this surging FX in force was appropriate used by the monetary and fiscal authorities to build the buffers. And we are seeing significant deleveraging of our external balance sheet like the reserves are increasing. Current account deficit narrowing, debt is falling in -- so current accounts is narrowing. So if you look at the reserves, reserves are slightly lower compared to the year-end, and it driven by the reduced [indiscernible] requirement for the attracted funds in foreign currency. -- in terms of auctions and intervention. So despite the moderation of FX inflows, we see there is a significant FX liquidity, and it is also visible in this chart, in the first chart, like National Bank of Georgia was bought more than USD 200 million during the first quarter of 2024. As I have mentioned, the National Bank of Georgia continue to ease the policy and reduced the rate by 125 basis points since inflation remains close to 0. On the fiscal side, we see debt level to reduce sharply, and it is mostly in -- so it is fully driven by the accelerating GDP growth as well as each significant depreciation of exchange rates. And several words about the debt structure despite the fact that 75% above -- more than 70% of the debt is external public debt. So the structure is good as we have like more than 50% of the external public debt is in fixed interest rate, which is very attractive during this time when there's a certain interest rates around the world and weighted average interest rate for the public that partly is 3.4%. So I guess it is the last slide for quick macro update, just several messages from us. GDP continue to be strong. Inflation is below 3%. We might see some pickup, but we take average inflation to be close to target this year. We have robust external balance sheet with improving reserves narrowing currency account deficit and reducing debt levels, all of these led exchange rate to be quite stable. And in general, policies stance. We think is appropriate for this current economic conditions. Thank you. And I will hand over to Irakli to continue the presentation.

Thank you, Nino. Let me start with our aggregate performance of our portfolio companies. So we had a strong quarter in terms of the revenue development. We had -- we were nearly 9% up. in Q1 year-over-year. Also, the -- if you look at the Q1 last 4 month 2024 compared to Q1 last 12 months of 2023, we were also nearly 9.5% up in terms of the revenue. The EBITDA was -- performance was even stronger. In Q1, we had a 17.3% EBITDA growth. And in last 12 months terms, we had a 6% EBITDA growth. In terms of the operating cash flow, we are up 31% in Q1. Last 12 months, we are down. But in full year, we expect a very, very strong net operating cash flow results for the 2024. We expect more than the 50% growth of the net operating cash flow in 2024. Also, the cash balances are moderately down, but that's due to the growth of our funding the growth of our portfolio companies. NAV per share development, you see that the listed and observable portfolio was the biggest contributor, around 9.6%. The rest was flattish. The private portfolio was, as I said, it was up 17% EBITDA [indiscernible], but in terms of the value creation in the hospital and pharmacies were low due to the -- in the pharmacies, we are growing our revenue and gross profit. And therefore, the -- and we are investing for this growth. EBITDA has the growth actually declined because of the investing in the growth, one reason. And another one is the hospitals have turned the corner, but they have that, as you see that in the second half hospitals of 2023, Hospitals were performing quite weakly. [indiscernible] was quite weak, sorry. And in Q1, we turned the corner, and we are very confident that hospitals will perform extremely well in 2024 compared to 2023. So that private portfolio performance in terms of the NAV growth contribution should improve, especially from the second half of the year. Now if you look at the NAV per share growth over the time, so over the exception of Georgia Capital, CAGR is 14.5% and it's been increasing recently due to the growth. Accelerated growth in terms of the NAV per share formation. We had a Q1, as you see, we have 8.6% NAV per share growth. So we are pleased with the CAGR, not happy with that. We want -- we are targeting obviously higher 20% plus. But we are on the right trajectory, and we hope that we achieve our lower objective of having a 20% plus NAV per share growth. In terms of the share buybacks, I mentioned about this, but here you see a development, how much we were buying each year -- how much we were spending each year, the capital in terms of the buying shares. And you see also the share count, how was been decreasing over the period. As you saw -- as you know, in 2020, we have the acquisition of the GHG, Georgia Healthcare Group with the [indiscernible] shares, and that is a result of the spike in the number of shares. So that's -- however, in total, as I mentioned, nearly 8 million shares we bought back during this period, which is around 16.5% of our issued share capital. Now in terms of deleveraging, you see the decreasing trend. Year-over-year, we had a strong decrease nearly 5 percentage point decrease in NCC ratio. Now we are -- we stand at 14.8%. This is on the back of the portfolio value growth as well as net debt declining from $152 million a year ago to $121 million. So we are on the right trajectory, and we continue our deleveraging story. And here is more kind of illustrating how this leverage ratio has been decreasing. Now you see a cash flow -- free cash flow formation, which has been increased quite considerably and that gives us the optimism for continued share buybacks, which we will announce in due course. Now let me give the stage to our CFO, Giorgi Alpaidze, to talk about the portfolio, company results and valuation.

Thank you, Irakli. Hello, everyone. I will speak about the valuation work that we did in the first quarter. So as you know, during the first quarter, we usually deploy the internal valuation method. So we haven't engaged a third party at this time, but we rolled forward the similar valuation methodology that we used in the previous quarter that was done by Duff & Phelps the third-party valuation firm. So you can see on this chart, the overview of what changed. Broadly, on a big picture basis, we continue to apply similar methodologies as before. The multiples have largely remained the same as at the end of the year last year or decreased slightly. I will walk you through each and every large and the investment stage portfolio company, how the valuation has changed. However, given the growth in the Bank of Georgia share price in the first quarter the Bank of Georgia and together the listed and observable investments reached 43% of our overall portfolio. Large portfolio companies were 35% and the investment stage was 15%, while the other businesses were now down to 7%. Bank of Georgia continues to be our largest portfolio investment followed by the Retail (Pharmacy), which is our largest private portfolio investment and makes up about 17% of the full portfolio. In terms of the portfolio developments that you see on the next slide, here, you can see that during the quarter, Bank of Georgia added more than $300 million large value to our portfolio and the portfolio reached close to GEL 4 billion value at the end of the first quarter. Given the recent performance of Bank of Georgia share price as well, now we can say we are above GEL 4 billion also. In terms of the value creation, we had education clinics in Diagnostics and the other business and insurance positively contribute to the value creation in the first quarter, while Retail (Pharmacy) and the Hospitals were negative contributors to the overall performance of our P&L in the first quarter. Now if we go through each and every business and we start with the performance of the Retail (Pharmacy) business, several key things here as we now have the increased branch network from the end of fourth quarter. You may remember we added 30 stores in 1 single quarter. We are now seeing the benefits of that translate into the higher retail income. So the income from retail was up by close to 9% in the first quarter. Wholesale income was down, but that was also a combination of the several smaller mom and pop stores closing during the quarter. We also saw that in the first quarter, the same-store revenue growth was positive for this business. It was up -- slightly up 0.6%, but it actually recovered from a negative same-store revenue growth in the first quarter of last year. The number of those issued increased average bill size also increased in this business, and we are seeing that we have now kept and balanced the operating expense growth that came with the salary increases and with the rent increases as a result of the increased network. EBITDA was down as you see 24%, but the state of the business that we see now, we would expect that this business will start recovering from this lower base in the first quarter. And from second quarter and beyond, it should be recovering in terms of the EBITDA and delivering strong results. You can see in the valuations that on the next slide, that because of this drop in the EBITDA, our enterprise value here decreased by GEL 22 million. The cash conversion was strong, which resulted in the net debt-to-EBITDA decreasing by GEL 2.6 million. So net-net, we had about GEL 20 million negative contribution to the equity value. The market will remain the same here at 9.7x, and the net debt to EBITDA increased, but only slightly to 2.3x. Next is the hospitals business. Here, the number of regulations that were adopted last year, business has now started to digest these regulations and it has translated into the growth in the revenues. The numbers that you see on this chart that shows 1.5% growth, but they're not necessarily comparable because last year, we had too many Hospitals, which we sold at the end of last year. So if we retrospect to update these numbers, we should be looking at more than 7% growth in the revenues on a like-for-like basis, while in the EBITDA, which is down by 13%, and that is way lower than the decrease that we had in the fourth quarter, which was close to 50%. Now instead of 13%, we would have the EBITDA being down by 8% if we normalize this EBITDA on the Batumi Hospital sale as well. Otherwise, we also see strong results in the growth of the occupancy rates in both large and specialty hospitals and in the regional hospitals. And additionally, we continue to diversify our revenue sources. And in the first quarter, our reliance on the government revenues also decreased by about 3% compared to the previous quarters, which is very positive development for this business. On the next slide, you see that in terms of the valuations, here, the drop in the EBITDA also meant that the enterprise value decreased by about GEL 12 million. We also had the negative cash conversion. So some of the receivables actually were delayed into the second quarter. So therefore, the net debt here increased by GEL 18 million. And in total, we had the GEL 30 million and negative value creation. In [indiscernible] LTM EV EBITDA remained the same and net debt-to-EBITDA increased because we had a decrease in the EBITDA in the -- on an LTM basis. Next, we have the insurance business. So here now, we combine both P&C and the medical insurance. Both businesses did well on a top line basis. So the overall growth was 19%. And then the growth in the P&C business itself was actually more than 20% as we continued to grow our portfolio of the -- diversified portfolio of the auto insurance, property insurance, agriculture insurance, corporate insurance and et cetera. On the P&L basis, P&C insurance increased by 11%. However, the medical insurance income decreased slightly, and that was a result of I know, February and March being very heavy in terms of the various viruses circulating in the country that resulted in the higher loss ratio for the business. However, this higher number of viruses were actually pretty positive for the polyclinics and the diagnostics business in addition to the hospitals, and we will see that later in the slides. I would highlight that broadly, the combined ratio remained largely well controlled within the P&C insurance business in the Medical, it was slightly elevated, but generally within our expectations. In terms of the valuation here, the implied market across both businesses. If we go to the next slide, we will see that [indiscernible] the next slide? Yes, here. We will see that because of the small increase in the net income, we had a growth in the equity value of GEL 6 million. However, this business paid of dividends of GEL [indiscernible] million. So as a result, the overall performance on an equity value basis was flat. And we have no leverage in this business and the multiple remains the same. The next, we have the investment-stage businesses and starting with the renewable energy business. So key highlight here is all hydros and the wind farms were operational in the first quarter. Unlike the first quarter of last year, when we had one small hydro start for renovation works. So as a result, we had a recovery in the electricity generation of 46% and the similar recovery in the revenues that you see in the dollar terms. EBITDA was also up close to 100% because all the growth went to the bottom line. And here, the selling price -- average selling price was flat over last year. This cash that we generated was used together with the cash that we had on hand to buy back and cancel $5.1 million worth of bonds, which decreased the aggregate size of the bonds of this business from $80 million to $75 million. So now the leverage is lower, which you can see on the next slide where we discuss the valuations and we didn't have any material changes here. But the leverage went down from 6.8x to 6.4x in this quarter, and you know we have a target of 6x and the leverage is trending towards to less than 6x in the coming quarters. Next, we have the education business. So in the education business, we continue to see strong results. Given the strong intake that we had in the fourth -- third and fourth quarter last year, we have recorded about 33% growth in the revenues in lari terms, I want to highlight here an important factor that the premium school that we own, which is the British-Georgian Academy, charges the learners in dollar terms. So any financing movements actually impacts the lari revenues there. And over the last 2 years, we had a strong appreciation of lari, as you know, so that impacted negatively the lari revenues. If you look at it on a constant currency basis, the revenue would be up actually by 40% instead of 33%. And if we look at EBITDA, which is up by 10%, on a constant currency basis, it is actually by close to 28%. So overall, in global terms, the business grew in much better terms than in lari terms. Few things I will highlight here is that we have reached in the 1% total capacity utilization on the enlarged basis. So when we're counting all the campuses or the expansions of the existing campuses that we added. And we currently have close to 6,000 learners and our capacities more than 7,000 learners, and we're looking to add more capacity for the upcoming September 2024, 2025 school year. This in a growth performance translated into the higher valuations for this business, as you can see here. And overall, the value of this business increased by GEL 13 million, most of which came from the growth in the EBITDA. Net debt was also positive here, which meant that it decreased by GEL 4 million, but also added to the valuation multiple decreased towards 16.2x. You know that we also look at the forward-looking multiple here, if we look at 1 year forward, so on 2024, 2025 academic year, then we have this forward-looking multiple coming down to 11x. So the 16.2x becomes 11x on a 1-year forward-looking basis. And net debt-to-EBITDA and leverage is pretty strong in this business, which is about 1.2x. The next business that we have is the clinics and diagnostics that has benefited in February and March from the higher admission rates in the country. You see here that the admissions in clinics increased by 16% and the total test performed by diagnostics business was also up by 19%. So overall, that meant that the revenue in this business went up by 25%. And the EBITDA, obviously, went up even higher, and it was about 83% higher up than last year and it reached GEL 3.6 million in the quarter. So good performance here, gross profit margins, EBITDA margins also improved on an overall basis. You know that we try to open up 1 or 2 new clinics every year, and we continue to be on track for the -- for this year as well. In terms of the valuations, these also meant that we had EBITDA growing and generating about close to GEL 6 million value creation. Net debt also decreased here that generated GEL 4 million. So overall, we had GEL 10 million equity value creation across the both businesses. And across both the multiple decreased from 12x -- close to 12x to 10.6x. And so did the leverage, which is now very close to our targeted leverage of 2.5x. Next, we have the liquidity. We continue to have strong liquidity now that we have decreased our bond size from 300 to 150. We're comfortable with the leverage between $20 million to $30 million we had $26 million and the decrease from the first quarter was mostly due to the buybacks that we did and the payment of the coupon on our $150 million bonds. Last but not least, we have the dividend income outlook. So this quarter was very important because we accrued dividends from the beverage, the beer business, which was the first time we ever received dividends from beer business given the strong performance there, very strong operating cash conversion. They were able to pay us GEL 5 million in the first quarter. We also received dividends from the P&C insurance, and we participated in the Bank of Georgia buybacks as we normally do so. In total, we collected GEL 14 million. Our guidance for 2024 dividend income inflows remains unchanged. We still expect between GEL 180 million to GEL 190 million dividend inflows from our businesses in 2024. With that, Back to Irakli for the wrap-up.

Thank you, Giorgi. So as I mentioned in the very beginning, we have a strong NAV reopened. We have a strong EBITDA growth momentum, especially for large portfolio companies, our outlook is pretty positive. Deleveraging continues. We delivered on our share buybacks and dividend inflow is coming into the [indiscernible] pretty steadily and will continue to do so. We are -- our outlook for the economy is strong. We expect strong economic growth and prospects are positive. Now let's move to the Q&A session.

[Operator Instructions] We have several similar questions on the geopolitics such as this one, how do you see the geopolitical situation of Georgia? What impact can it have to the recent process on the company?

So basically, I see 5 or 6 questions very similar about the local politics and geopolitics. So I'll try to address it to all the questions in one. So basically, the track record of Georgia has been that we always had disagreement in the society. But in the end, we moved forward stronger. So I hope that this time will be the same as the track record shows. We see the government say that they will have their onto move towards [indiscernible] the same with the opposition. It seems like they have a different path [ through ]. But I think that at the end of the society agrees and we move forward towards next step of our EU integration, which is the opening of the talks. Meanwhile, we have 3 [indiscernible] regarding the law, and we hope that this also will be resolved in due course, as always does.

The next question is from James [ Bannon ] What is your view of the exchange rate as foreign inflows moderate?

Yes, I will address that question. So thank you for the question. So first of all, when we are talking about the exchange rate, so there are different drivers. So the [indiscernible] is one of the drivers and other drivers to form the currencies, for example, demand and supply on [indiscernible] demand and sub on the U.S. dollar. So what we saw in the previous year. So at first in 2022, the appreciation came from the surging FX inflows and last year, it was especially from the second half of the last year, it was mostly driven by the increasing loans in foreign currency. So the second part was the main component for the currency. So what we see now is that despite the fact that FX inflows are moderated, we see that there is a significant FX liquidity in the country. And it is also visible in the intervention. So the National Bank of Georgia bought GEL 200 million in the first quarter when the FX inflows moderated. So it means that there is a significant FX liquidity. So despite the FX informal duration, we don't expect any significant changes. So we are talking about the macro factors. So we don't see any significant macro factors which will affect the currency fluctuation this year in the medium term.

The next question is on the education business. So in the education business, utilization improved dramatically, but profitability declined. Why is that? You would expect the opposite. This is the question from James [ Bannon ].

Yes, I can answer that one. So James, but partially because of the FX comment that I made earlier, but it is also because when we ramp up and we add so much in terms of the OpEx and the learners and the teachers and the admin costs, initially, it all flows within the lower margins. But as we ramp up even further, all that income flows into the bottom line directly because you don't have much more additional expenses. Those are the two main reasons. We have a strong outlook there.

Another one is basically, we opened two new schools, which occupancy rates are low, which is dragging the performance down. So even though the part we will increase, but increased occupancy on the back of the schools, which already had a high occupancy. There are two new schools, which are very low occupancy. And that is basically taking the operating performance. But we are -- we have a strong outlook there. So -- and we are -- we will be ramping up the occupancy of the newly opened schools.

The next question is from [ Jon Yann ]. What's the update on the compulsory third-party liability insurance? And how is the reinsurance business coming along?

So government approved the bill, which is basically the insurance will kick in from the 1 of January 2026, and we expect this to be approved by the parliament before the year-end. So basically now, at least we have a certainty. Outlook is -- we expect -- we hope from 1st of January '25, but it seems like it's going to be postponed for 1 year, but with the certainty that now we have some indication from the government approving this -- approving this bill.

How big would you be comfortable with Bank of Georgia becoming as a proportion of the portfolio? That's the next question.

We are running a very concentrated portfolio in general. I mean -- so basically -- for us, the absolute value and relative values are important, and that's what we are looking at. So we don't look as a proportion of the portfolio.

Would you have any color on domestic having flows and potential implications or possible emphasis on the private book if you would consider exiting to the domestic market?

You see the capital for [indiscernible] has become pretty strong in the country, and we see strong deposit growth, strong savings. The pension fund, the local pension fund is growing these assets pretty fast. So I don't exclude probably not -- I mean, the -- you see that the bond market -- local bond market is actually pretty well operational. We placed $150 million of bonds, of which more than 50% was rented to retail hands. So that's kind of the positive it. But I doubt that in the short term, we can do the equity placement. But maybe in the medium to long term, it would be possible to do exit of the local market.

The next question is from [ Anton Burg ]. Do you have an update on the sale of any portfolio companies also with regards to buy the capital allocations, Will it come from the year's dividends? Or can you increase leverage in any portfolio companies?

Basically, the -- on the sale -- we cannot really give you an update, it's kind of the private discussions, but sale of good portfolio company. But on the buybacks, we will do the buybacks. And one of the things is that we are expecting dividends -- strong dividends are coming into the end of the Q2 and Q3. So this year, we will do the buybacks from the cash flows which are generated. So this is in line with our future of our past track record of doing the buybacks.

The next question is from [ Jon Yann ]. For other businesses, are you looking into selling them? Or you might grow some of them?

Mainly selling, but there could be some opportunities to grow to sell. So basically, the -- but the idea is always to sell, the other business.

Thank you. I think there are no open questions as of now, maybe we can wait a couple of minutes.

Thank you, everybody. We have no more questions. Thanks, and stay tuned, and we are obviously, as always, open to your questions if you have some bilateral inquiries. I appreciate your time and see you soon on Q2 call. Bye-bye.