Georgia Capital PLC

LSE:CGEO

Earnings Call Transcript

[Irakli Gilauri, executive]

[Audio Gap] We issued a new bond, $150 million new bond on the local stock exchange. I will talk about this in more greater detail later on. We nearly retired all of the GEL 300 million GCAP level bonds, which we issued 5 years ago. So I think only $16 million left which will be retiring full in September. So gross leverage has been substantially changed, it halved from $300 million to $150 million. We also bought our minority shareholder in retail pharmacy. According to the agreement, we were going to buy 10% but ended up to buy 20% at the same valuation.

So we went to from 77% in the retail pharmacy to 97.6%. Also, we had a nice development in terms of the NAV per share. We grew more than 8% in the quarter, record high NAV per share at more than GEL 73. Also another good development that our NCC ratio, our key target has decreased by 2.3 percentage points at 17.4% end of the Q2. So we are way ahead on deleveraging promise and nice developments there. And also, we have received substantial amount of dividends in Q2, more than GEL 120 million, of which there's a big portion is one-off, but nice cash inflow we had in Q2 at GCAP.

So to move forward and Shako will help me to move forward. So let me talk about -- a little bit more about our new bond. So because of the size of the leverage we wanted to decrease substantially, we decided to do a local bond. Out of $150 million, $110 million were anchored by the IFIs. So we had a big anchor demand already. What I'm pleased also that it is sustainability-linked bonds. And I'm pleased with this one, obviously, and we have our targets, and we are hoping to meet these targets to support the climate change mitigation base.

The annual coupon rate was 8.5%, maturity is 5 years. Important point we have that it's callable after 2 years. As you know that our target is to go to zero gross debt in short to medium term. So the call option was very important for us. Bond is rated at BB minus, one notch upgrade to the previous bond. So we had progress on the credit rating as well.

So just a little bit of information for you to look back on this. In total, we had $365 million of gross debt, which we issued in dollars, but looking back, what it cost us in terms of the Lari, we ended up paying 8% in Lari when during this period of time, the interest rate was between 11.5% and 14.5% in Lari terms. So basically issuing the dollar bond paid off for sure as we have made a spread over the -- substantial spread over the Lari interest rates.

We go back on the next slide. Shako, I can control it now. To go over to next slide, we have a breakdown of the final bondholders. And the reason I want to show this one is very important. New client -- new investor base we have discovered in Georgia, which I am pleased to have such a big support from the local retail investors, which showed the -- which showed to us there's a lot of trust for Georgia Capital locally, and it was largest placement to local investors ever in this country with $83 million subscribed by the local investors, which was 55%. So we had to scale back the IFI substantially from $110 million to $67 million as we will come more and more retail investors into our bond.

So our long-term partners, the European Bank for Reconstruction and Development, IFC and the Asian Development Bank participated. We had a new IFI joining the ranks, Asian Infrastructure Investment Bank, which I'm pleased to welcome as our new partner. And we are looking forward to working with this IFIs with GCAP and with our portfolio companies, obviously. The good thing is we have the total retail investor base of around 175 people, basically retail investors participating in this bond.

So another point was that we have increased our shareholding in the retail pharmacy from 77% to 97%. We expect substantial dividend flow to increase over the next couple of years. So we are pleased with this increase of shareholding in the retail pharmacy. In terms of the NAV per share growth, our key metrics from 2018, CAGR was nearly 12% in Lari terms. In terms of the U.S. dollar and pound sterling, it is a little bit higher than 12.4%. CAGR growth over the past 6 years, not the best results, I must say, but not the worst either. We hope to accelerate the NAV per share growth going forward. In past 6 months, year-to-date, basically our NAV per share grew nearly 12%. So we expect substantial NAV per share growth this year.

So in terms of the share buybacks, our track record has been at -- in total, we bought back more than $70 million of shares, about 6.8 million shares. As you know, we have been buying almost all the time of geographic existence other than the during COVID times when we had a cash preservation strategy. And now we continue to buy back shares. So that's kind of our -- sorry, recently bought exactly 1 million shares. I don't know how we ended up buying exactly 1 million shares, but we ended up buying those shares. So it's around 2.2% of our share capital. So we have a decreased number of shares further. And we are obviously looking forward to decrease the number of shares towards the 39 million where it was share count when the GCAP was incepted.

Free cash flow, very strong free cash flow generation we had over the past 5 years. In 2023, we expect $20 million. That's a recurring one. It doesn't include the one-off of $34 million, which we received from the Bank of Georgia buybacks and one-off dividend we received from our pharmacy retail. In 2022, we had that number -- full year number was $11 million. So we have a substantial increase over 2022 and substantial increase in during the COVID time what we had. In 2020, we had negative. In '21, we had whole $1 million of the free cash flow. So substantial progress there. We are pleased with this another milestone, which we are looking to increase our free cash flow over time.

I will ask Nino to continue with macro. After that, I'll talk about the performance of our portfolio companies in Q2 and first half 2022. And then Giorgi will present portfolio valuations and liquidity and dividend income outlook, and I will do the wrap-up in the end. So Nino, please continue the...

[Nino Vakhvakhishvili, executive]

Hello, everyone. Thank you, Irakli. As usual, I will provide quick macroeconomic update on Georgia. So we have prepared several slides. Here, we have the messages we think is most important and interesting for you. You can see additional information in our extended presentation. And of course, your questions will be highly appreciated.

Let me start with the GDP growth, and let me tell you several words about the general global economic outlook. Now global -- despite the fact that there are some upward revisions in terms of global economy, still global economy is expected to -- the growth is expected to be slower compared to last year. So last year, global growth was 3.5%. And this year, according to the latest projections, it is expected to grow by 3%.

And it is interesting to that mostly this slower growth is attributable to the advanced economies rather than emerging markets. So looking at the aggregate numbers, so mostly in emerging markets, the countries which are commodity exporters do have some challenges related to the lower commodity prices. On average emerging markets are going compared to advanced ones.

So the scenario for the soft lending is still on the table. But of course, there are some risks. There is huge uncertainty in the global economy, despite the fact that this merged U.S. and Swiss banking turmoil was quite nicely averted and contained. Still, there are some risks related to the additional shock or some geopolitical -- geopolitics. And that's why this soft lending scenario is not guaranteed yet.

Now let me move to Georgia. So we had 2 years of double-digit growth. And despite this high base effect, Georgia economy continued to expand nicely. During the first half, we had 7.6% growth. And the drivers for the growth was quite similar to what we were talking like last year. It was mostly the external demand and FX inflows from the external side. And on the domestic side, we have loan growth, which increased more than 13%, excluding the exchange rate. So these drivers, which was true for last year growth also continued to lead strong growth this year also.

So on the other hand, we had below target inflation. Since April 2023 inflation fell below the target. So the latest number printed at 0.3%, and it is significantly lower compared to 3% target, and we do expect very close to 0 numbers to be maintained in the coming months and then inflation start to increase to reach the targets. National Bank of Georgia started to ease the monetary policy, and I will talk a bit later on.

On the next slide, we have several interesting charts. So last year, it was quite -- there was many interesting developments last year was related to the sanctions on Russia. And we were telling that we have this high skill labor immigration. And so we were expecting that this immigration will have -- would have some positive impact on our GDP growth. Now we have charged to show that this was kind of true. So we're seeing information and communications sector to jump in terms of value creation. And so there was a significant jump in share of GDP also like -- on average, it was like ICT sector had some 3% share in our nominal GDP and after the second quarter of last year. So share jumped and reached 5.5% in the first quarter of 2023.

And looking at the fourth quarter like after second quarter of last year or after sanctions on Russia. So we see this ICT sector to be the highest contributor in terms of GDP growth. Rather than gross domestic products, we like this sector due to its significant contribution in current account also. So when we are talking about current accounts and when we are talking about the service exports, the tourism is the key source of the service exports and the share of tourism in service exports exceeds 70% before the COVID, then sharp fall and recovered to 62%.

And now ICT sector -- so any diversification in any of the -- any macro variables is always welcome. And so we also welcome this new sector, which shows that -- which share increased sharply. So it was quite insignificant before 2016. Then the sector starts increase the share in our service export, and it reached 16% of total service export in Q1. And to tell you some numbers like in 2021, we had exporting like close to USD 150 million ICT services. Last year, it jumped to more than USD 500 million. And only in the first quarter, the service export -- ICT service export exceeds USD 200 million.

So we like this sector due to its high value potential and potential to accelerate productivity and it has some positive developments in GDP in current account and in general economic activity.

So there were some other developments last year, like in this next slide, please. So we have -- in the next slide, we have our current account deficit. So last year was quite exceptional for us. We had some record numbers like record low current account or record high reserves or record high FX inflows, stuff like that. So this year, we see that the trend continues. There are some switches in terms of -- among the FX and reserves, reserve FX inflows. But on an aggregate level, FX inflows continue to maintain at an elevated level.

Current accounts are reduced last year to 4%. Mainly, it was attributable to the recovery of tourism revenues, but most prominently, it was the current transfers, which contributed positively. This year, in the first quarter, current account deficit printed at 3.2%. To compare the first quarter of last year, it was 13.3%. So its significant development and significant improvement in our external balance sheet.

So in terms of FX inflows, like tourism revenues continue to recover. So it's recovered to 2019 levels even last year in terms of revenues. But in terms of number of visitors, we are still recovering. So in first half, tourism revenues increased by 58% compared to last year, and it recovered to 124% of 2019 levels. Remittances, which was like the highlight of last year, FX inflows continue to increase, especially in the first quarter of 2023, and it remained at an elevated level, more or less. In total in 7 months, it increased like more than 30%.

And as far the exports, so this year, we think that this story is more like on export rather than remittances. And this is another kind of shift in our economy. So we were always telling that Georgia do have this strategic location, which means that we are kind of bridge between Eastern European countries and landlocked Central Asian ones. And after Russia's invasion of Ukraine and sanctions, the so-called middle route corridor, the importance of this corridor even accelerated. And we see some ongoing negotiations to improve logistics, to improve legislation, stuff like that to increase turnover and to increase the cargo through this route.

And it is reflected in numbers also. So this year, total export increased 15.7% and fully, it is attributable to the export rather than domestic exports. So we had -- so looking at like the last year's number -- and development is also interesting. Like we see that our export to the Central Asian countries expanded, increased, and we see that the export is gaining in strength. And it was the first time when our exports exceeded domestic exports. So this route while gaining, its strengthened importance.

So this FX inflows, which remained at elevated level and even increased further support our currency. So GEL continued depreciation appreciated by 3.2% year-to-date against the U.S. dollar, less than 1% against the euro due to the euro strengthening against the U.S. dollar.

On the next slide, we have some -- like summary of the policymaking -- macro policymaking in general. So as I have mentioned, inflation is way below to the target level, 3% and National Bank of Georgia started to exit from Titan mentor policy. And they are quite slow, and we think that it's appropriate for Titan and this test is appropriate because despite the sharp falling inflation, there are some sticky parts in our consumer baskets, like mostly services and domestic inflation, which remain at elevated levels.

And also, there are some pressures -- price pressures coming from more than expected economic activity. And also, we see some pressure from the wages. Despite the fact that wage growth kind of slowed down, it still exceeds the productivity. So that's why due to this kind of risks from the demand side and from the wages, National Bank of Georgia is quite careful, and we think this chance is quite appropriate.

So they did 2 cuts -- 75 bps cuts and according to their current projections, they expect to do from 50 to 75 bps more cuts this year and to gradually decrease the interest rate in the coming years. So National Bank of Georgia appropriately used this favorable timing to rebuild the buffers.

In net terms, they bought like GEL 1.6 billion and increased the reserves GEL 5.1 billion, which is 29% higher compared to last year. On the fiscal side, the fiscal stands moderating on the back of their commitment to reduce the fiscal deficit below 3% cap. So according to the Liberty Act, we have fiscal deficit kept at 3%.

So there is some interesting development in the deficit itself. So looking at the operating balance, the operating balance was always positive and operating balance -- the difference between current revenues and current expenditures. And the deficit for the fiscal policy was mostly attributable to the capital expenditure rather than the current expenditure. So it was like the last previous years due to the COVID and increased the social expenditure and reduced revenues. So operating balance was negative. But after 2021, the operating balance again started to be in a surplus territory, which is very important, we think.

On the debt side, debt is below to the pre-pandemic level, mostly due to the 2 years of double-digit growth as well as significant exchange rate depreciation. Ministry of Finance do not expect and plan any sharp movement in terms of debt level. They are more thinking about switching to the domestic debt rather than external debt. That is why their projections this year of external debt is slowing.

And I want to note thing. The structure of external debt despite the fact that we have most of the debt denominated in foreign currency, the structure is quite favorable. And despite the fact that we are living in one of the fastest rate hike cycle in the history, most of our external debt is denominated in fixed interest rate, and that's why they are rated average interest rate on the portfolio is close to 2.7%, which is quite favorable during this time.

So in the next slide, we have some wrap up like the key messages we wanted to deliver. The GDP continues to be strong. Inflation is below target, and we expect inflation to be below the target this year. We might see some over shooting in the first half of next year and then gradually return to the targets. In the medium term, balance sheet improved significantly last year, and we see this robustness to persist. GEL continued to appreciate. We've done expect any significant changes from these levels in the short term. And macroeconomic framework for Georgia is sound and this is the key strength for our country mentioned in the reports prepared by IFIs or rating agencies.

So this was all from my side. Now I will hand over to Irakli to continue the presentation. And of course, we appreciate any questions during our Q&A session. Thank you.

[Irakli Gilauri, executive]

Thanks, Nino. Let me start with the performance of our portfolio companies. The aggregate revenue growth of our portfolio companies in Q2 was up more than 12%, and in the first half 11%. We reached GEL 1 billion of revenue for our portfolio companies in the first half and nearly GEL 530 million in Q2. So nice growth we continue to experience. We had a growth in NAV as well. Sorry -- we had a growth in EBITDA as well in our portfolio companies. That grew -- in Q2, the EBITDA grew by 7.3%. And in first half, more than 4%. So not a high-growth on EBITDA side, but continues to grow nicely.

In terms of the cash flow developments, we are funding the growth but importantly, the -- we are down in operating cash flow due to the timing on the hospital side and the other portfolio companies, but mostly on hospitals, as the government is moving a new system that delayed the cash inflows. But overall, we expect the cash inflows to grow along with the EBITDA and the growth of the company in general.

So NAV per share growth was, as I mentioned, more than 8% but it consisted with the portfolio -- company grew by the 2 percentage points. Our listed and observable portfolio grew more than 5%. Due to the buybacks, which we have -- we've done recently, it grew by -- it contributed to 2 percentage point growth. Operating expense was negative contributor, obviously 0.3% and the liquidity management FX has actually contributed negatively 0.7%. So that's how we ended up growing the NAV in Q2 by more than 8% and the NAV per share stands now at a record high at GEL 73.2.

Now on the update on deleveraging. Our most important metric is -- one of the most important we watch is net capital commitment ratio. And actually, we had the question I just saw in the messages that, why we are not doing the $50 million large 5x as the NAV discount is more than 60%? I think that the answer is in this slide. So I will answer this slide. Basically we are targeting to delever the HoldCo, the investment company, which right now stands at 17.4%, and we want to be below 15%. And that's where we would be doing more larger buybacks basically to increase our NAV per share even more rapidly basically.

So the -- what's the ratio, the answer is that we need to watch this ratio basically to -- it gives you a good guidance when we are doing a tactical small buybacks and when we are doing the large -- when we can do the larger buyback. As here is a development of the our NCC ratio. In 2019, it was a record high of 42.5%. And after that, we have now at 17.4%. As I said, our target is 15% over the cycle, and that's what we are aiming for in order to do a larger buyback.

Now our portfolio results and evaluation, Giorgi? I will ask Giorgi to take over the presentation.

[Giorgi Alpaidze, executive]

Thank you, Irakli. Hello, everyone. I will start the presentation by providing the overview of the portfolio valuations as of the end of the first half. To highlight here, every 6 months, as you know, we have the independent valuation company. So this time, valuations were done by external third-party valuation firm.

And to summarize, our portfolio increased again, as you will see on the next slide, and about 31% of the overall portfolio was listed an observable portfolio, that's Bank of Georgia and our 20% stake in the water utility business. We had nearly half of the portfolio in the large portfolio companies, about 16% in the investment stage and the other portfolio remained largely unchanged at less than 10% or 9% of the overall portfolio.

The valuations were performed consistently with how they were done in the previous periods. We applied this similar future cash flow DCF models combined with the multiple-based approach and the -- any precedent transactions that we saw during the last 6 months as well. So overall, our largest portfolio company continues to be a retail pharmacy where the valuation increased largely because we now bought out the minority shareholders, and that meant that the minority stake is now decreased significantly and instead our valuation in this business changed.

The hospitals business and the insurance business continued to be in our second and third largest businesses. We'll talk later in the slides. But in the insurance business, we had a change in the law, which is pretty much allowing insurance companies and putting them in line with the other companies in Georgia subject to the Estonian model, meaning that when the insurance companies will pay dividends to us going forward, they're no longer subject to any -- either corporate taxation or any dividend taxation.

Therefore, going forward, they will not be paying income taxes. And as a result, when we reassess these future cash flows given that these loans adopted in the first half of 2023. This resulted in a one-off increase of about GEL 40 million in the insurance business valuations in the first quarter. That, combined with the strong performance of the insurance businesses, led to the higher valuation, which is close to GEL 350 million at the end of the first half.

We will next talk about itself, the portfolio developments during the quarter. So as you know, in the first quarter, we continue to participate in the Bank of Georgia buybacks, and we trimmed our stake close to 19.9%. However, despite of this, Bank of Georgia shares continued to rally. We had a positive performance and the Bank of Georgia overall added GEL 53 million to the value of our overall portfolio. Then from the large portfolio companies, GEL 29 million largely came from the insurance company that we discussed and investment stage GEL 9 million, that was also largely due to the education businesses.

So our portfolio at the end of the quarter was GEL 3.3 billion. If we summarize where the gains came from in the valuations in the first quarter, they were largely from both insurance companies, P&C and Medical, GEL 65 million in aggregate. That includes the one-off related to the tax legislation change and plus the normal gains, organic gains from the growth of the net income. Education business was another second largest loan generating GEL 8 million in this quarter.

Now diving into the individual portfolio companies and starting with the retail pharmacy. That actually had a very strong quarter in the second quarter despite of the headwinds that this business has been facing in 2023, given the certain government regulations that were adopted that kept prices for certain drugs. This business performed really well. The revenue growth was more than 5% in the second quarter. They translated into double-digit, close to 12% growth in the EBITDA line as well.

This was also supported by the strong same-store revenue growth, which last year, as you see, it was negative, but this year, it turned positive, which is about close to 3%. However, this is positive on the back of another appreciation of the local currency, which is usually negative for the same-store revenue growth. So this business has done really well during the second quarter. And we discussed earlier that there has been a buyout of the minority shareholders in this business, which impacted the net debt which you can see on this slide.

However, the minority interest reduced almost with a similar amount. As a result of this buyout, we have also used the cash that we had in this business to buy out the minority shareholders together with the third-party debt. And on top, there was a one-off dividend that we received from this business about GEL 20 million, and there will be an additional about GEL 6 million that we will receive in the third quarter, that has also impacted the net debt.

So overall valuation of this business, when we look at the enterprise value was slightly up. But because of the movements in the net debt, the equity value was slightly down by GEL 27 million. Although, as you can see, the multiple in this business also decreased the implied multiple from 9.3x to 9.2x. Adjusted net debt was slightly higher than our targeted 1.5x, but we expect this will come down to less than 1.5x EBITDA by the end of this year as the business continues to generate cash during the second half of the year.

In the hospitals business, as we expected, we hit the inflection point when the revenues and the EBITDA started growing. You can see on this slide that they were in the high single digits. This is because last year, the second quarter was a very low base given the exit from the COVID contracts back then. So this business continues to recover from the loss of the occupancy rates that we experienced last year, and they are on the recovery trajectory. As we look at in the second quarter, that recovery has started.

In the valuation-wise, we didn't have much impact on the equity value here, while the enterprise value increased. As it was mentioned earlier, some delays in the collection of cash from the government impacted the net debt. So the net debt was also up by GEL 18 million, similar to the enterprise value increase. Therefore, they offset each other and the impact on the equity value was minimal.

Insurance businesses. We talked about the one-off impact from the taxation change, but organically, both P&C insurance and the medical insurance had a very strong quarter, 20%-plus growth in revenues and the net income. And this growth was also as a result of the very diversified growth of their revenue streams across multiple products, which includes product motor, credit life, agri products border, MTPL and obviously, the medical insurance, where we saw the number of insured clients and the premiums also grew.

We also show that the combined ratio in the P&C was up but still within the range that we look at between 80% to 85%. The growth was largely due to the claims in the agri insurance that we provide due to the bad weather conditions during the second quarter.

But overall, very strong performance for this business, which is something that was also strongly reflected in the value creation in this business. And you see here that for the P&C business, the value went up by GEL 45 million, and it's valued now more than $100 million if we look at it in dollar terms, and we continue to have no leverage in this business.

In the renewable energy business, it was a relatively quiet quarter. The business continued to produce revenues and generate cash flows. However, one of the small hydros continue to be off-line during this quarter due to the refurbishment works. That has completed and -- from the beginning of July, that hydro is back up and running. And the reason for the decrease both in the revenues and the EBITDA is related to lower electricity generation because of that one hydro being off-line. There is no material change in the valuations here. The business continued to generate cash in this business. And the valuation remained the same as at the end of the first quarter. That's $95 million for our equity value in operational and pipeline projects.

The next one is the education business, which continued to have a very strong quarter. The revenues grew by 27.5% and I will highlight here that we have continued to grow the capacity, and you will see that capacity has now grown close to 7,000 learners at the end of the second quarter. We expect that by the end of September, this will grow close to 7,300. There will be another 400 learner capacity that will be added.

We're also seeing a very strong implication of the new learners for the upcoming school year. So the current number of learners is 4,500 but with this strong pipeline, we think, and we currently project that there will be more than 1,000 new learners that will be added to our school. So that will take the number of learners in excess of 5,500 learners.

So this strong performance in revenue, the performance in the EBITDA was not as strong, but that's because we have been investing in growing the school. So there is some OpEx associated with it. But if we normalize that, the EBITDA has been growing double digits as well.

The strong performance was reflected in the valuations. Enterprise value was up by about GEL 4 million, but also the net debt was down as the business continued to generate cash ahead of the school year. So overall, the gain that we had in this business was GEL 7 million, but the growth was about GEL 9 million as we invested about GEL 2 million in this business to build the new schools.

Last but not least, this is the Clinics and Diagnostics business, who also had an inflection point given the last year's low base when we had to exit from the COVID contract with the government. So the growth here was very strong, 18% growth in the revenues in an aggregate level and about 38% growth in the EBITDA, which was driven by the recovery in the number of admissions and the registered patients in this business, both in the Clinics and the Diagnostics and these businesses continue to generate cash, and then they also continue to invest in the growth. We have been adding the new clinics. And as a result, we have invested and the net debt continue -- net debt grew in this business by about GEL 7 million.

So overall, even though enterprise value grew because of the strong performance in the bottom line, the growth in the net debt where we still do not take into account the future revenues that come in with this new clinics when they will open. The equity value was slightly down by GEL 5 million.

This is about the operating performance of the company. Now liquidity and the dividend income outlook with a little bit of an overview. We had a very strong liquidity at the end of the second quarter, $173 million which was up by $20 million plus compared to the end of the year. Since then, we also collected dividends from Bank of Georgia, roughly about $22 million, and we used all this cash then to pay down the debt, as you saw earlier in the slides. And following this paydown, we will have, at the end of this quarter, about $150 million remaining local bonds -- the sustainable local bonds. And on top, we expect to have about $40 million liquid funds on our balance sheet available.

In terms of the dividend income, we continue to have a very strong dividend inflows in the first half, one of the stronger starts of the year that we have seen -- is actually the strongest since the demerger. We have collected now GEL 148 million dividends in the first half, and this includes the Bank of Georgia dividends that were -- where the ex-dividend date was at the end of June as well.

From this GEL 148 million, GEL 98.6 million is what we call the regular dividend. So these are the dividends that we expect are sustainable and continue in the future, et cetera. The one-off dividends, which one of them is the retail pharmacy dividend, GEL 20 million I mentioned earlier, plus the participation in the Bank of Georgia buybacks for the portion of their buybacks that was done last year, we treat that as a one-off as well. So that's another GEL 50 million. And in total, we have GEL 148 million.

When we look at the projection for the full year, we still expect that on a regular dividend-wise, we will at least get GEL 50 million, could be as high as GEL 60 million. And then the one-offs, there will be another 5 million that we expect to collect from the retail pharmacy business as a one-off dividend. And so this -- what you see here is that the strong recovery is providing a very good stream of dividends, regular dividends, like we have not seen in the previous periods.

On this bright note, I'll go back to Irakli for the wrap-up.

[Irakli Gilauri, executive]

Thanks, Giorgi. So I think that we told all the points, just let me repeat that NAV per share, we are at record high. NCC ratio, our key metrics for the buyback program is approaching our target, which is 15% and now we are at 17.4%, strong dividend, as Giorgi said, in Q2, and we expect these dividends to grow further -- the regular dividends to grow further in second half. Converting to buyout of the retail pharmacy, minor shareholder, we have decreased the gross debt from $300 million to $150 million. And we think that's an important point for us to decrease the leverage first and secondly, to continue decreasing it.

Now let's move to the Q&A session. [Operator Instructions]

[Unknown Executive]

[Operator Instructions] We have one question which I think we already addressed. This refers to the 60% NAV discount.

[Irakli Gilauri, executive]

Yes, we haven't. Basically, we are -- I just want to reiterate that we are big supporters of buyback. Especially on such a high NAV discount, we think that the value creation for shareholders is good by doing more buybacks. Big substantial buybacks will come as we will be around 15% of our SEC ratio.

And obviously, we want to fix our balance sheet substantially before we go into a bigger buyback. So when we do a bigger buyback, we don't want this NCC ratio to go above 15%. So that's kind of our target throughout the cycle. So any further questions? Please don't hesitate.

[Unknown Executive]

There is a question from [indiscernible]. You mentioned government moving to a new system, which caused the 69% net operating cash flow decreased. Would you be able to elaborate a bit further?

[Irakli Gilauri, executive]

I mean, we received this money in July. So it's like a time thing. It's not a substantial thing. It's just the DRG system, which is upgraded from previous one, which is a little bit better system for us in terms of the further cash flow generation that -- as we were moving to -- from one system to second system, the cash inflow has been delayed by a couple of days. So that's kind of what we had.

So overall, it's basically the calendar issue, not the cash flow issue.

[Unknown Executive]

Next question from [indiscernible]. Who holds the other 2% of retail pharmacy business?

[Irakli Gilauri, executive]

Our -- we have the -- we have our -- the guy who -- executive who work with us in business, and he was shareholder of the company with whom our pharmacy merged. So we had 2 partners, now 1 partner is out and then the second partner is there and we'll be buying him out over the period of time, over 10 years and longer. These executive is with us, better, as we've been a very good partner with him.

[Unknown Executive]

The next question is, thanks for the presentation and good results. As inflation is very lower, do you see Central Bank policy rate at year-end and -- year-end '23 and the year '24, what would be the impact of the lower interest rates on your portfolio companies, if any, except BOG?

[Irakli Gilauri, executive]

I mean the interest rates, I mean, Nino, jump in. So we expect the interest rates to go down as the inflation is down, the cost of borrowing for our portfolio companies will decrease. It will be a positive side and rest Nino, please.

[Nino Vakhvakhishvili, executive]

Yes, sure. So in terms of the interest rates, so as we mentioned, they start to exit from Titan mentor policy, but they are quite careful due to the fact that price pressures still exist from the demand side. So according to their projections, they plan to reduce the rate by additional 50 bps to 75 bps this year. So it will stand and in close to 9.75% maybe this year at the end of 2023, and they will gradually decrease the rate according to the current projection to 8% in 2025. So current path is quite slow and they are telling that -- of course, this is not the promise. This is just the projection of interest rate, and they will use this data-driven approach for further policymaking.

[Irakli Gilauri, executive]

Nino, there's another question from James that do we -- are we fearful of Lari weakening due to the weak ruble? So what can...

[Nino Vakhvakhishvili, executive]

Yes, sure. So what we see is that correlation to ruble quite small for Georgia because -- due to the fact that looking at the FX inflows despite the surge las year. Still, we have other sources for our FX inflows. We see some impact in terms of remittances, like the remittance is still alleviated, but bit slower compared to last year's peaks. But this FX inflows is quite kind of -- this is -- there is a significant peed in terms of export and in terms of other destination like we see that remittances are surging from other countries like the U.S. and other countries, but we see like the lower FX inflows from Russia.

There was different factors. One of the factors we think is attributable to weakening ruble. But as you know, today, they had this emergency meeting and surged the rate to respond to this ruble depreciation and inflation expectations. So we think that in the medium term, we might see some like the short-term movement of ruble. But we don't expect any significant impact on GEL. So you can see that ruble started to depreciation quite early and so GEL was quite strong against the U.S. dollar and appreciate it.

[Irakli Gilauri, executive]

Thanks. In general, basically, if you talk just to add on the ruble and the Lari linkage. It's a very limited linkage there because there is a very little trade going on and remittances mainly are coming outside Russia. Mainly EU countries have taken over the inflow of the remittances to Georgia. What we have, we have a lot of Russian -- not a lot, but some substantial number of Russian IT specialists are ramming in Georgia and they are exporting the IT services. So it's not related to Russian economy at all. So that's why we don't think there will be an impact on the Lari due to the weakness of the ruble.

[Nino Vakhvakhishvili, executive]

No, just I will add one point. We had like the, last year some analysis to see the sensitivity to Russia in general of Georgia and Georgia so looking at the region. So we had like very insignificant exposure to Russia despite the fact that so we have some experts, we have remittances and stuff like that. Exposure is -- excluding the last year migration impact, exposure in general is quite limited. So we don't expect any significant moment. Thank you.

[Irakli Gilauri, executive]

So we have a question about the NCC ratio. Are we giving a guidance when we are going to reach the NCC of 18%. We are not giving the guidance, but we aren't far away of NCC of 18%. In general, the point which I was making that we want NCC of 18% over the cycle. We had a 10% growth in 2021, with another 10% growth in 2022. We are having a 7.5% growth this year. So it is -- we are pretty -- it's a high cycle.

So we want to be below the 15% when we announced the big buyback, and that is below 15% so that after the buyback, we are still below the 15%. So it's not a -- we reached the 15% and the big buyback comes. So I want to plug that, we are -- 15% is over the cycle. So we would want to be below 15% now.

[Unknown Executive]

Yes, I think Milosz has a lot of questions. Milosz you can unmute yourself and ask your questions, and then we'll continue with the questions that came through the Q&A.

[Milosz Papst, analyst]

Yes. Thank you for the presentation. I just wonder if you could comment in any way on the dividend outlook across your private portfolio companies beyond 2023. I mean keeping in mind any investment or deleveraging needs.

[Irakli Gilauri, executive]

Thanks. Giorgi, maybe you talk about that the dividend outlook.

[Giorgi Alpaidze, executive]

Yes, sure. So Milosz, I mean, you saw that at least in the second half as well, in the P&C insurance, we have reported about GEL 8.4 million dividend. We expect a similar amount in the second half. In the 2024, we expect the organic growth in that business. And organically, they've been growing. If you look at last 2 years, double digits, close to 10%. So you would think that, that growth will continue to be there as well.

Renewable energy. We also expect this year, they paid about $3 million, and then the growth there can be also $3 million to $4 million next year. But the bigger growth we expect to come from is the retail pharmacy, one for the reasons that our stake has increased there now that we own close to 98% but also because the business, as you saw on the slides, is having a very strong growth momentum in the second quarter.

You can expect that what they paid this year is a one-off and they will pay a regular dividend this year, which is about GEL 15 million from this business. The next year, we should be looking at GEL 20 million to GEL 30 million. Those will be the key private portfolio dividend outlooks, but we provide more tailed outlook at the end of the fourth quarter when we publish the fourth quarter results. It's a little bit too early for 2023.

[Unknown Executive]

The next question is from [ Floris Steenkamp ]. Can you explain a bit on the performance of the hospitals. Margins are still well below 2019 levels? Are there any structural differences compared to 2019? Or what needs to happen to get back to those levels? Also what are the constraints to increasing utilization of hospitals further, given that there has been such an influx of people into Georgia. Out of expected, we would see more people coming to the hospitals.

[Irakli Gilauri, executive]

So basically, the -- just to start from the end, we have young people coming to Georgia, so they don't require that much hospitals. But just to give you the bigger picture what we have that over the past 3 years, number of hospital beds have increased substantially. So it went out to around 18,000 hospital beds from 12,000 or 13,000 hospital beds. That was driven mainly pre-COVID and mainly during the COVID times to handle COVID.

And now we have -- and which drove our utilization down. And now our utilization is lower than during the pre-COVID times. Therefore, the margin is lower. However, just a new decree came out from the Ministry of Health recently, which have increased the standard of the emergency rooms which we are estimating will drive the number of hospital beds from 18,000 to back to where it was 13,000, 14,000, which would increase the utilization of our hospitals.

So that's kind of structurally, that's what we are expecting. There is a structural issue, which is -- which we believe will be fixed over the next 6 months as the regulation on the emergency rooms have substantially strictened, and we are in compliance with that -- mostly in compliance. We are doing some innovations, but mostly compliance of this new emergency rooms, expectation is around 14,000 hospital beds to decrease our utilization to increase.

[Unknown Executive]

The next question is from David, not an investor yet, but would like to become. What would be your advice just to me and others like me about ways to become an investor in the future.

[Irakli Gilauri, executive]

I mean I think it's -- you buy shares. So if you want to become investor as we cannot advise more than that.

[Unknown Executive]

Thank you. There are no open questions as of now. [Operator Instructions]

[Irakli Gilauri, executive]

If there are no further questions -- or there is one.

[Unknown Executive]

There is one. Any comments on the political situation?

[Irakli Gilauri, executive]

I mean we are where we are. Basically, we have a -- we have a dialogue with EU. We have -- now the government has been talking with the Chinese as well on the corporation. We expect -- in December, we expect the candidacy status. Elections are next year in October. So I think that we'll have more clarity back then. But I think that there have been a lot of different meetings, high-level meetings with EU leaders recently by Georgian Prime Minister and the hierarchy ministers. So we are waiting for end of the year where the decision will be made on the EU candidate status. So let's see, I think, Harvey, you know as much as I do about Georgian politics.

[Unknown Executive]

Yes, Harvey. Harvey responded that he does not know.

[Irakli Gilauri, executive]

Anyway, okay, here we have another question.

[Unknown Executive]

Yes. The question is any clients to sell assets from other small companies?

[Irakli Gilauri, executive]

We -- basically, we wanted to get the price right. As I said, that the other portfolio companies are subscale and more strategic for us and if we get a good price, we will. You saw we've been selling pretty actively the hotels. We almost completed. We have only one hotel left for sale. We sold commercial real estate before. So we are out there and we see what we can achieve. But yes, this is -- at right price, obviously, we are sellers of the subscale businesses.

[Unknown Executive]

Yes, I think there are no questions. One just came through. If I remember, your target ROIC of around 12% for your hospital business over the medium term, as the long-term returns you would expect from the business?

[Irakli Gilauri, executive]

We should get to that point. I think that we are in a low single-digit ROIC area now but we have been restructuring the group. And also, we expect the occupancy rate to go up. I think the low teens is a realistic in the medium term to achieve, that's our target anyway.

[Unknown Executive]

Yes, I think there are no open questions.

[Irakli Gilauri, executive]

Thanks, everybody, for participating in our Earnings Call and listening to us, and we are looking forward to present even a stronger Q3 and even stronger Q4 as we expect this year, macro to drive -- macro growth to drive high and also our portfolio companies to continue to deliver.

Thanks again, and looking forward to seeing you. Bye-bye.