Georgia Capital PLC (CGEO) Earnings Call Transcript & Summary

Hello, everybody. Thanks for attending the Georgia Capital Q3 Results Call. Let me start by highlighting our -- today's schedule basically. I'll talk about the key developments in Q3 and 9 months. Then our Chief Economist, Nino Vakhvakhishvili, will talk about the macro update. And Giorgi Alpaidze, our CFO, will talk about portfolio results and liquidity. In the end, we will have a wrap-up session. And as usual, we'll have a Q&A. So let me start highlighting 6 main points for this quarter. As you know, today, we announced the sale of 80% of our beer business. I'll talk about much in greater details later on in the presentation. We also are up in NAV per share by 6.2%, which is a strong performance, mainly by our private portfolio companies. We also had a record high dividend inflow of GEL 119 million in Q3. As a result, our NCC ratio decreased substantially to 15.9% with a 3 percentage point decline. We had an aggregate -- also record high aggregate revenue and aggregate EBITDA for our portfolio companies. They are up 12% and 16.5%, accordingly. So a strong performance on EBITDA side as well as on the revenue side. Operating cash performance is strong. We have more than doubled year-over-year to GEL 102 million, which is also a record high. And also, we repurchased more than 2 million shares in accordance to our share buyback program in Q3. That's a pretty significant buyback program, which we have conducted. So in total, we repurchased more than 10 million shares over the life of the Georgia Capital, and that represents 22.5% of the GCAP's peak issue share capital. And I'm very pleased that we are very close to the number of shares where we were at the demerger in 2018 basically, numbers -- in terms of number of outstanding shares. Now regarding the sale, we expect inflow of at least GEL 63 million from this sale. We will be divesting 80%, effectively 73.9% of our equity interest. We will remain as a shareholder and we'll have a put call option starting from 2028. This is divestment, as you know, is in line with our strategy, as we said that we want to divest our other businesses as well as the businesses, which are capital-heavy. And basically, this business represents exactly the one, which we were targeting to divest. We sold it to the very reputable investor. It's a Royal Swinkels from the Holland. They run the beer business in Holland and in many different places. They also have a brand licensed here in Georgia. So they need Georgia as well. So that's -- and in terms of the valuations, basically, we sold at a premium to NAV, around 40% premium to NAV, which gave the 1.8% [indiscernible] uplift to the GCAP NAV per share, if we count as of the first half and the first half. So that has a significant premium to our NAV basically. And this represents around 5% of GCAP's NAV and 10% of the -- more than 10% of the GCAP's market cap, this transaction. So in terms of the operating performance of the beer business, it was very strong. We were growing significantly our revenue as well as EBITDA. So the management did a great performance of this business. And actually, the CEO of beer business now is heading our pharmacy business, and CFO of the beverage business became the CEO of the beer business. So basically, the excellent performance by our management team in terms of delivering the great operating performance and hence, interest from the international strategic buyer. In terms of the -- if we look at the NAV per share breakdown, operating performance of our private portfolio company contributed 7.5%, which is pretty significant. It tells you the economy is growing pretty fast, our portfolio companies are benefiting and growing nicely. We have a minus 3.8 contribution from multiple change. So basically, our -- the Valuation Committee decided to bring down some of the multiples we were applying to our portfolio companies. Another positive contribution [indiscernible] contributions from buybacks, 2.5 represented the positive contribution to the NAV per share growth. So in total, we have an NAV per share growth of 6.2% in Q3. Here, you have a kind of a more long-term view on the CAGR. So we have a CAGR of 11.6%, after the inception of the Georgia Capital over the 6.5 years-or-so. That's a buyback program, which we are very proud of, what we've been delivering. And you see we've been consistently buying back shares. And in total, we spent $123 million, which is 22% of the -- more than 22% of our issued share capital as of the -- in the peak times. So that's -- and I'm particularly pleased the number of shares, as you know, when we took over our health care business as we bought it with this new share issuance of Georgia Capital. So our number of shares at the inception was 39.4%. It grew to 47.9 million shares in the peak, and now it's down to 39.8 million shares, very close to the number, which we were at the inception of the Georgia Capital. So if we look at the portfolio results, we have in the quarter, our revenue grew 12% and it grew across the board. It grew -- we had a nice growth with large portfolio companies, investment page and other companies. So in every segment, we had a strong revenue growth, but especially the growth was very strong in our large portfolio companies. That's both in Pharmacy, Hospitals as well as Insurance benefited from the economic growth, and they have grown significantly. Over the 9 months, we also have a 9% growth across the board of the revenue. On the EBITDA side, we have a similar picture but [ this cost saving ] higher 16.5% gross in EBITDA Q-over-Q. It's GEL 79 million in aggregate EBITDA, and we had a strong growth that large portfolio companies versus stage portfolio companies in the quarter. Over the 9 months, we have a 15% growth of the EBITDA. In terms of the cash flow, you see a very strong cash flow generation. We doubled in Q3, GEL 202 million. In 9 months, we also more than doubled GEL 215 million. So very strong cash flow generation of our portfolio companies. We are printing cash across the board. Let me give you a small update on the deleveraging. You see our one of the key ratios, which will follow NCC ratio, which peaked at 80.9% in the second quarter, but it came down back to 15.9% as we accumulated more cash as dividend inflow came in. And please note that we've been -- in this quarter, we've been buying back a lot of shares. So we were spending a lot of cash also despite of the buybacks with our NCC ratio declined by 3 percentage points. This is due to dividend inflows. This is over time, as you see that we are managing down to 15%. This is our kind of over-the-cycle target. And as economy was booming, we were a little bit of 50%, we went to 19%. We are back to 15.9%, but I wouldn't exclude that we will go upper than 15% because of the very strong economic performance that we are seeing in Georgia and the strong performance by our portfolio company. Now let me give the stage to Nino to talk about the macro.

Thank you, Irakli. Hello, everyone. As usual, I will do a very brief macroeconomic overview of our country. Economic continues to be very strong as preliminary real GDP numbers in 8 months came in 10%. And according to the recent International Monetary Fund's projections and world economic outlook, Georgia is going to be, again, one of the fastest-growing economy in our region in the short and the medium term. And if you look at the nominal GDP in U.S. dollar, so nominal GDP in U.S. dollar is expected to more than double at the end of the year to GEL 33 billion compared to 2020. On the other hand, we have very low inflation as the headline number came in 0.6% in September, and inflation is below target since spring last year. On the next slide, we have some charts showing and trying to explain the key drivers for our strong economic performance. In the previous call, if you remember, we were telling that the key drivers for the strong growth we are [indiscernible] domestic sector and that the FX inflows have been moderating since the second half of the last year. Now in the third quarter, we see that FX inflows starting to pick up again and to increase compared to the same period of last year like remittances, which were like there was a significant one-off remittances after Russia's invasion of Ukraine as there was capital reallocation as well as migration impact. And from the second half of the last year, there was a significant fall in our remittances. And now what we see is the remittances target [indiscernible] flatten compared to last year despite the fact that we are still seeing the decline in remittances from the Russia, the remittances from U.S. and European Union compensate this decline and remittances kind of flattening. On the other side, the tourist revenue continued to increase and there are significant our surge in our expert -- goods expert as we had -- there was surge in to the Central Asian countries, and we see some pickup for our domestic experts, local experts like ferroalloys and the copper. On from the domestic sectors. The Georgian banks continue to be a very strong engine for our economic growth. Bank loans increased by 18.6%, and we see significant activity, both in the retail and business. But we should highlight the significant contribution from the business loans and there is a significant demand what we observed in the local and foreign currency. For the fiscal side, despite the fact that fiscal policy was quite supportive as we are in the election year, so fiscal policy, we're quite sound like the fiscal deficit debt levels were sound because of the strong economic activities as government managed to accumulate extra GEL 1 billion in revenue collection compared to budgeted numbers on the back of stronger economic activity. And we still see labor for us to be quite strong with the lowest employment, historical low employment and the highest number of employees and wage growth despite some moderation with still wage growth to be quite significant. And in line with the low inflation, there's a significant purchasing power, increasing purchasing power for our consumers. On the next slide, we wanted to show some significant deleveraging, which is like ongoing deleveraging in our economy. And if you look the debt level, well, not only for government but the debt level for government and banks and other financial corporations and no financial corporations. The total debt level declined significantly and we see this to be lower since 2013. An international investment position, which is like the assets and -- variable of assets and liabilities, Georgia versus the rest, it has also improved significantly and lowest since 2012 and significant deleveraging is happening on the back of very high GDP growth number and the exchange rate depreciation. And if you look at the flow variable like the current account deficit, we see significant improvement there also, which there -- on the back of strong FX inflows and economic activity. On the next slide, so we wanted to show some variables, which kind of reflects the volatility and the -- some geopolitical contentions, uncertainties in our economy because these macro variables do not reflect -- they do have some legs and this is the more frequent variables, which reflect the uncertainty. So we have here exchange rate and market capitalization. So as for the currency, so there was significant depreciation in -- during spring right after the Russian's and street protest. But due to the fact that we had the strong FX inflows and the strong economic activity, USD, GEL declined to the level, which is kind of more macro fundamentally driven. So as for the spreads, we don't have proper yield curve in the hard currency for our country. There is only one bond issued by the sovereign maturing in '26. But there was significant surge in the spread after Russia's low end despite some adjustment, it is the spread is still higher compared to the spring level and for the market cap, I will not spend much time here. You're looking on a daily basis. And for the last slide, just for the -- if you want to assess kind of macroeconomic framework, which is more like the fiscal policy and monetary policy. On the fiscal policy, we see that operating balances at historic high, we see fiscal deficit to be 2.5% of gross domestic product, which is lower compared to target. And as I have already mentioned and I will tell you again that the [indiscernible] economic activity was so strong, but revenue accumulation was much higher compared to the budgeted number, which gives some comfort and their fiscal policy remains sound. For the monetary policy side, National Bank of Georgia decided to cap the rated 8%, so they reduced the rates this year. But the latest monetary policy meetings capped the rate at 8% despite the low inflation as there is still risk. We have more than expected economic growth number and on the -- for the external sector, we see some geopolitical tensions in Middle East, which might affect the oil prices and inflation at home, and there is some still uncertainties which might affect inflation. So that's why National Bank of Georgia was kind of cautious in terms of reiterating monetary policy rates and kept at 8%. In terms of intervention, National Bank of Georgia was quite proactive before the election and intervene the [indiscernible] in order so they wanted to exchange rate to be aligned to the macro fundamentals and at the level driven by the uncertainty. So that's why the interaction was quite intensive before the election. So on the last slide. So we have just like a very quick summary. We are exploring the economic growing quite strongly at 10% in 8 months. So the inflation remains below target. External demand, which was kind of moderating in the previous quarters. Now we see supporting economic growth. Again, external balance sheet remains solid, and we see significant deleveraging on the back of high growth and exchange rate. Strong exchange rate and macroeconomic policy framework remains sound and appropriate. Yes, so this was a quick overview from my side. I will hand over to Giorgi to continue the presentation. Thank you.

Thank you, Nino. Hello, everyone. I will take you through our third quarter numbers then include the valuations and the NAV that we put out at the end of the quarter as well as the individual performance of the large portfolio companies on the next few slides. So starting with the valuations. In the third quarter, we did the valuations in-house based on the same methodology that our external independent third-party valuation firm uses every 6 months. The only change share that we applied was given that the beer and distribution sale transaction finalized in October. We applied -- we used the valuation from this transaction as an adjusting subsequent event and applied the same valuation to the end of September numbers. So when you see here the other portfolio of GEL 327 million, that already assumes the exit valuation of the beer business, which is the reason why the percentage of the portfolio of the other business grew from 7% to 9% here. Elsewhere in the listed and observable portfolio. We continue to use the share price of Bank of Georgia as observed in the London Stock Exchange. In water utility, we continue to apply the put/call option valuation structure that we have with the majority shareholder there. We had a small increase there given the strong performance of the EBITDA in the water utility business. In the large portfolio companies, you would see that within the Insurance and the Hospitals business, the multiples came down significantly. The key reason for that was a very strong operating performance of these businesses where the EBITDA and the net income grew as expected in the DCF calculations that we put together at the end of last quarter. So this performance growth resulted in higher EBITDA, thus resulted in lower multiples. With this, we had equivalent 38% in listing and observable portfolio and 38% within the -- sorry, the large portfolio companies within our overall portfolio. On the next slide, you see the contributions to our P&L from devaluation changes. So the biggest contribution came from the other portfolio companies that includes the valuation uplift of the beer business, Retail Pharmacy was the second largest contributor with GEL 38 million, and we will look at these individual valuation gains on the later slide. The next one I would highlight is the Insurance business where we also had a very strong performance. In terms of the portfolio value chain. So even though the portfolio value decreased slightly, it's part of the reason was, for example, Bank of Georgia paying both the full year and the interim dividend during the quarter affected the reduction in size here of GEL 123 million, but elsewhere large portfolio companies and the other portfolio companies contributed to the growth. Now in terms of the individual portfolio company performances. Here, starting with the Retail Pharmacy business. So this business is trending in the right direction across the board. You may recall, 3 quarters ago in the last -- in the fourth quarter last year, we had decrease in this business due to the various regulatory changes and the introduction of the price caps. So EBITDA were coming down. Now that the EBITDA decrease has reversed, and we are reporting for the last 3, 4 quarters, where we're reporting the first growth in the EBITDA of 2%-plus. We have a very strong revenue growth. The retail revenues increased by 6%. And what we also like very much in this business is that the gross profit continued to grow, thanks to the actions that the management has been taking and the gross profit has now reached 3.6% in the third quarter. The business continued to generate cash. And as you can see on the next slide, net debt decreased here actually by GEL 18 million. So part of the value creation of GEL 38 million came actually from the cash generation of the business because the net debt was down and then the rest came down to the EBITDA increasing during the quarter. So overall, we had GEL 39 million equity valuation gains here. Multiple remained the same. And given the net debt improvement, we saw the leverage ratio come down from 2.4 to 2.2. And we do expect that the leverage will come down again in the fourth quarter as the business continues to grow. Very strong outlook for this business in the fourth quarter. We should be reporting on EBITDA basis, 30%, 3-0, 30%-plus growth in the EBITDA in the fourth quarter. The next is the Insurance business. Also, a very strong performance here across the board, both for P&C insurance and for the medical insurance business. So really P&C business, you will see that the revenue growth was more than 25%. We also saw -- and it was spread out across the different products. But what we also saw was combined ratio improved and reverted back to our guided range, which is between 80% to 85%. So it's now inside the range at 84.4%. Part of the reason here has been the absence of the one-off large loss events that we had last year. That include the land slide in one of the regions in Georgia and some of the hailstorms that we observed in the Kakheti region that effected the agriculture insurance last year. Obviously, this large growth in the revenues translated into a very strong P&L for the P&C insurance business that you see has reported a record quarterly P&L of GEL 8.4 million. In the Medical Insurance business, also very strong growth, also very good combined ratio, which is now about 86.5%. But at the same time, we are now -- we added the Insurance business, as you know. So together, these 2 businesses reported more revenues actually for the first time in this quarter than the P&C business. So also very strong growth here. And overall, we saw the GEL 5 million or GEL 4.9 million that we had -- the net profit for this business more than doubled to GEL 13 million in this quarter. So all this strong performance in the business drove actually devaluation changes, which you can see on the next slide, which is our second biggest valuation changes. Here, the PE multiple came down to 10.9x from 12.4x and the growth of the LTM pretax profit by GEL 6 million resulted in about GEL 16 million valuation gains for us. And lastly, I would mention that the leverage that we took on in this business to acquire insurance, the leverage ratio came down from 0.7x to 0.3x, on the back of the growth in the net profit of this business. Next, I will present the Hospitals business. So again here, you saw the last quarter, we had flattish growth in the EBITDA this quarter as we -- as the business has been able to absorb the changes in the regulations in this industry. We are reporting the growth -- very strong growth in the revenues, high single digits, 9%, and very strong growth in the EBITDA of close to 37% on a reported basis. But on a like-for-like basis, when we adjust the last year's P&L to exclude the Batumi Hospital, the one that we saw at the end of last year, actually, the EBITDA growth is close to 40%. So we are seeing the very strong dynamics in this business. It's improving. We're seeing the patient flow is growing again. We are seeing that more of the outpatients are coming within our hospitals that's helping with the gross margins, and that's also helping generate more revenues. And as we go forward in the fourth quarter also, we also expect very strong growth. The growth in the EBITDA should be higher than the growth that we are reporting now in the third quarter. So this strong growth also resulted in strong valuation performance here. The multiple came down by 1x from 12.5x to 11.5x. We had net debt that was largely stable. And we also saw that on the back of the EBITDA growth, the leverage ratio came down from 6.2x to 5.9x, which is still higher than our targeted range. But on the back of the growth in the EBITDA and cash generation, we expect that this ratio will continue to come down significantly over the next few quarters. So I'm not going to present other business lines today, just cautious of time and probably the questions that you have, but all these numbers are available in the pack. So if you have any questions, we can discuss later. In terms of the liquidity, we had a record dividend inflows for one single quarter in the third quarter. And even though we did a lot of buybacks in the third quarter, we still managed to grow our liquidity from $25 million to $48 million. And this liquidity is pretty strong for our balance sheet. And as you know, we are continuing to do more buybacks for the coming weeks. However, debt has not changed. This is still the $150 million bond that we issued in the local markets last year. Lastly, about the dividends. So we have so far collected GEL 169 million dividend, what we call the regular dividends already. And our guidance for the regular dividend this year remains at GEL 180 million, which is a similar level as the last year. With that, I would go back to Irakli for the wrap up session. Thank you, everyone.

Thank you, Giorgi. So to wrap up, we made a divestment. As we mentioned, per share has been growing nicely on the back portfolio company operating performance mainly and due to the buyback, our recurring dividend is in line with our guidance, and we are collecting the -- we will continue to collect the dividends from our portfolio companies. We have a record high revenue and EBITDA growth and the EBITDA level basically and net operating cash flow is strong, more than doubling, and our buyback program is working hard. We'll be now buying back and we continue to buy back on this weakness. So we expect a strong economy this year to continue, and we expect our portfolio companies to benefit from that. Now let's move on the Q&A session.

Thank you, Irakli. [Operator Instructions] We have a number of questions in the Q&A. Maybe we can start with [indiscernible] question. He has several questions. The first one is, have you seen any decline in the interest from potential buyers post the political news last month? Maybe we can take this one, and then I'll read out the rest of the question.

Basically, I think that -- I mean the sale of the business proves that there is interest from the Western strategic buyers. And overall, we are engaged on different portfolio companies in line with our strategy. So we are happy with the engagement in general.

Thanks. The next question from Anton is what's the maximum of the liquidity you can buy back and are buying back at this level?

Giorgi, maybe you will address this question?

Sure. So there is a limitation on the price. You cannot pay more than 5% premium to the previous [ day ]. In terms of the volumes, ideally, it's 20%, 25% of the daily volumes. And we are, at the moment, spreading the amount of buybacks that we have left over each day. We don't want to be buying back all the liquidity on each day. So there is the market that is setting the price and then the buyback is part of the daily liquidity. But generally, we buy 20%, 25% maximum on a daily basis.

Thanks, Giorgi. Maybe you can take the last question from Anton as well. Can you share a rate sensitivity for the private portfolio, like the extra dividend to free cash flow you would expect to get if local rates decreased by, say, 100 bps?

I don't think we have that readily available, but does not necessarily mean that the decrease in the rates translate into higher dividends straight away. I mean one sensitivity that we shared that you may find in the release is 100 bps impact on the WACC translates into GEL 150 million impact on the portfolio value. So let's say, if the interest rates come down by 100 bps, our portfolio value will increase by GEL 150 million, the private [indiscernible].

But on the cash flow in terms of dividends, we don't have that number yet, but we will look at it and come back to you. It will be an interesting number.

Thank you. The next question is from [indiscernible]. I've been trying to understand your calculation on operating performance, taking retail or pharmacy, for example, you reported GEL 36 million in 3Q '24, but EBITDA is GEL 21 million and the net cash flow is GEL 22 million. So how does the operating performance get calculated? I see it's the change in the value based on actual or expected. So can I infer that circa GEL 14 million difference is actually the expected performance above the actual performance?

It's really the 3 components. I think you have the first 2 already. So it's the EBITDA change that you should multiply it by the beginning multiple. So whatever was the multiple at the beginning of the quarter that we were applying to this business. The second one is correct, the net debt change. So if the business produced a net debt, decrease in net debt, that's the value generation that goes in the operating performance. And the last one is, if we have the exits. So for example, the exit from the beer business also goes in that line, which was the case that happened in the third quarter.

Thanks, Giorgi. The next question is from [indiscernible]. Has the revenue growth in the beer and distribution business being purely organic in recent years?

Yes. It was all organic. There was maybe some acquisition of the brands, but brand, but mainly it was organic.

Thanks, Irakli. The next question is from [ Andrew McGregor ]. What are your major concerns post the election and from the President that it was not free and fair, are you worried about sanctions? What are the key indicators that you monitor in this regard?

I mean we will -- we should wait the development. But basically, the overall results have been announced, preliminary results. We have the [ OCD ], assessment, which was initially was mainly positive. So we will wait. There are different assessments are coming in, but we will wait and see how it will develop. But that's what's kind of -- we are monitoring really the assessment of the different organizations, and we'll see. We'll see where we end. But usually, in Georgia politics, you have a lot of, let's say, disagreements.

Thank you, Irakli. There are no open questions in the Q&A. [Operator Instructions] So the next question is from [ Walter Davis ]. Given the current NCC, the asset sale cash generation and put option for the water utility becoming exercisable from 1st of January next year. If I'm correct, is a tender for a large share buyback under consideration?

I'm -- we will come back on that one. As I said, that we need to close the deal first, and we will come back on that. We are considering everything.

Thank you. Let's wait. There are no open questions for now.

It seems that there are no more questions. Thanks, everybody, for attending...

I think [indiscernible] ask a live question.

Yes. I was curious to ask in the report, you've mentioned that the share of Bank of Georgia has been reduced to 19.1% below the target of 19.5%. Are you expecting to [ rebuy ] back that existing difference or how is that to be thought about?

Yes. I mean, basically, I think that what we are doing with -- what our Treasury is doing is adjusting on the some of the -- on the values of the stock and Bank of Georgia is buying back its shares, and it will be increasing. While we are speaking, probably it's increasing our shareholding and we have a buyback as well, of course. But this is what business as usual. We've done it many times with this kind of moment.

Thank you. [indiscernible] do you have any follow-up questions or...

No, that's all from me.

Thank you. There are no open questions as of now.

Okay. Thank you, everybody, for attending our call, and stay tuned, hopefully, positive news from Georgia. Bye-bye.

Goodbye.