Full Year 2019 Georgia Capital PLC Earnings Call Apr 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Georgia Capital PLC earnings conference call or presentation Thursday, February 27, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Giorgi Alpaidze Georgia Capital PLC - CFO * Irakli Gilauri Georgia Capital PLC - Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Bram Buring Wood & Company Financial Services, a.s., Research Division - Equity Analyst * David Samuel Shapiro Vanshap Capital, LLC - Chief Compliance Officer * Henrietta Seligman Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap * Maria Kolbina VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst * Nikolay Kovalev VTB Capital, Research Division - Equities Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by and welcome to the second half and full year 2019 analyst investor call. (Operator Instructions) I must advise you that your conference is being recorded today on Thursday, the 27th of February 2020. I would now like to hand the conference over to your speaker today, Irakli Gilauri. Please go ahead, sir. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [2] -------------------------------------------------------------------------------- Thank you for introduction. Thank you, everybody, for joining the call for us to talk about our full year results. Let me break down for today's agenda basically. I will talk about the macro development in Georgia, GCAP performance in terms of the NAV and also I'll talk about the capital allocations. Giorgi will talk about -- our CFO, Giorgi Alpaidze, will talk about the performance of our portfolio of companies and the valuations, we were -- how we do it. And then I will do a wrap-up. After that, we'll go to the Q&A session. Let me start with the macro overview. Good news 2019 was good growth of 5.2% GDP growth which was ahead of the -- everybody's expectations, including IMF and other IFIs and economists in general. So the Georgia has performed extremely well in terms of the growth of the macro. We had a -- macro was mainly driven by the -- this growth was driven by the net exports growth as well as step up from the fiscal spending from the government, as the government has spent the record high of GEL 3.6 billion in development of the infrastructure projects in Georgia and also the export, higher exports, both in terms of the goods and the services and plus imports basically contributed to all-time low current account deficit in the country, which reached the negative 4.4%. This is down from 2018, we had a current account deficit of the 8.2%. So there is a significant -- almost half the current account deficit in 2019. And that was, I would say, that is a -- that was one of the bigger achievement of the macro performance basically in Georgia. On the other hand, the bad news was that we had an inflation hike in 2019. Inflation reached in December 7%, which was way above the target level of 3%. That led to the increased interest rate by National Bank to -- by 250 basis points to 9%. And that will -- we hope to -- inflation to be contained. Inflation was mainly driven by the [devaluation] policy when oversupply of lari was delivered to the banks to issue the loans in Georgian economy. But the good news is now, this has been realized and that has been reversed. Therefore, we would expect the inflation to calm down. Let me talk about the tourist numbers because that's a big contribution of the Georgian GDP in terms of the outlook going forward. 2019, as you know, that in 2019, in July -- or June, basically, the Russia restricted the flight -- direct flights to Georgia, which led the slowdown of the Russian tourists. But -- and the overall tourist growth was 1.4% in terms of direct tourist revenue. EBITDA growth was 7%. But it seems like we have been stepping up in terms of the tourist. Further in January, we had the growth of the tourists from the -- nearly 18% growth of tourist numbers, which was pretty unexpected because last year, in January, we had the Russian tourist arriving. So base is high. So we do not expect such a high-growth rate in January, and February is also seems like a high number as well. So we had a tourist growth from EU, which went up 42.7%. We had a tourist growth from the Israel, which went up 78%, and in Azerbaijan, tourist growth was 29% in January. So outlook for the tourist in 2020 is pretty positive, provided the coronavirus won't affect much. And so far, we had only one case of the coronavirus, which was contained at the border. So our authorities works pretty well. Border police had identified the coronavirus potential kind of a threat, and then it was identified that it was one case. So all the people who have been in touch with this person been quarantined. So far, as we say, so good. Let's see how the things develop in Georgia in terms of the coronavirus. So rest, I would say the outlook in the region is strong. The outlook also for Georgian macro and fiscal spending is also very strong. And if this tourist growth continues, we would expect that growth will be closer to 5% again in -- maybe 4.8% to 5% basically in 2020. Let me turn now into the Georgia Capital performance. Good news is that we have now the audited financials in terms of the valuation of the -- our companies of our portfolio. So we have moved to IFRS 10 -- or we are in process of moving to IFRS 10, which would help you to see the auditor's views on our valuations. And we will no longer be consolidating the financials of our portfolio companies. So the way you will see the presentation of financials, you will see the stand-alone Georgia Capital financials and the valuation of each of the portfolio company. So let me start with the presentation, which we have distributed. On Page 6, you see a GCAP performance highlights. So basically, the NAV per share grew by 5.7%, which is not obviously the high-growth rate we wish for. But if you had a more granularity here, you had a NAV per share for private portfolio companies grew by 20.9%. And the weighted average growth basically ended up at 10% growth. The listed company had a negative growth rate of -- declined the value per share by 8.4%, and it had a weighted percentage change was 4.4%, and that's how we ended up with 5.7% growth, 10% weighted average growth for the private companies and negative 4.4% from listed companies. And our NAV per share by year-end stood at GEL 46.84. Now this growth of the private portfolio was driven by the value creation we had of GEL 168 million value was created in the private portfolio and negative GEL 34 million was created basically in the list portfolio, which led to the total portfolio value creation of GEL 134.4 million. We had a busy year in terms of the investments. We made investments in total of GEL 357 million, and we also had a GEL 125 million of buybacks. Good news is that our dividend income was up 68.6% and that dividend income totaled GEL 122 million in 2019. So the cash generation and dividend generation is -- was very strong for 2019. And management fees, also, we have efficiency in terms of the management fee expense ratio, which stood at 1.8%, below our target of 2%. And net income of the group stands at GEL 71.6 million. That was kind of the highlights of our Georgia Capital stand-alone numbers. And let me turn now with more granularity in terms of the value creation. On Page 7 of our presentation, you see a table which highlights value creation in different segments. In listed segment, the negative GEL 33.9 million is divided by 2. GHG contributed to nearly GEL 200 million negative value creation basically in terms of the GHG and Bank of Georgia was positive GEL 165 million. So that's how we ended up with the negative GEL 34 million value creation. In terms of the private assets, the late-stage entities, GEL 157 million value creation was from Water Utility, Housing and the P&C insurance. Water Utility was nearly GEL 75 million of value creation, Water Utility; Housing, GEL 35.6 million; and P&C, GEL 46 million. Early stage overall blend, it was negative GEL 5 million, mainly driven by the negative beverage -- from Beverage business. Even though the second half was breakeven for our beer business, whole year was still negative in terms of the value creation. In pipeline, we had a 16 -- sorry GEL 17 million positive. Auto services value creation, PTI business has been performing very well and generating business. And that's kind of the breakdown of our GEL 134 million of value creation for 2019. In terms of this capital allocation on Slide 8. You'll see a breakdown between investments, buybacks and dividends. So investments, total number of investments, we had over GEL 358 million, of which GEL 130 million was invested in GHG shares through the share exchange program, which we have run -- which we have closed in December. You all know results of this share exchange program. In renewable energy, we invested GEL 46 million. Renewable energy investments was made mainly in Hydrolea, which the 20-megawatts, which we bought in Georgia in October and in November, we bought the Qartli wind farm, the only wind farm in Georgia is now owned by us. So we had a good year for the renewables. On hospitality business, we invest -- hospital and commercial real estate, we invested GEL 87 million. This is related to both the commercial real estate, which we have built under the housing business and the hotels where we have been investing. Also, the investment was due to education. We, as you know, we have bought the 3 schools. In total, we spent another GEL 50 million in buying the British-Georgian Academy which is high-end school and probably one of the best schools in Georgia. We've bought 70% of British-Georgian Academy. We also bought the mid-end school called Buckswood International, and then in August, we bought the Green School. So in total, we have allocated nearly GEL 50 million in education. In February, we invested GEL 41 million, which was mainly driven by 2 investments which is the Kazbegi brand, the oldest beer brand, we bought in March, and we also bought the Alaverdi winery, which had 270 hectares of the vineyard. So that's kind of -- in total, these investments accumulated GEL 358 million , of which GEL 113 million was in forms of the share issuance from GCAP and the rest, GEL 240 million was cash investment. In buybacks, we have spent GEL 125 million. And in dividends, we have -- and on average price was -- we bought was around GBP 10, the GEL 125 million buyback, and we bought 3.5 million shares. In dividends, we have received GEL 122 million, as I mentioned, and this we are up 68% year-over-year. In total net, I would say capital allocation was GEL 360 million. So that's kind of -- another kind of a metric, which we talk about on this slide is cash flow generation. Consolidated cash flow generation was up 39.8%, basically nearly 40% year-over-year. And the total consolidated cash flow generation was GEL 229 million in 2019. So we are very happy with these metrics. On Slide 9 in our presentation where you see the total portfolio growth in 2019. You'll see that our total portfolio value went up nearly 20%. It went from GEL 1.9 billion to GEL 2.3 billion. Listed portfolio assets grew only by 5.1%. So it went from GEL 977. 8 million to GEL 1 billion. And but private portfolio growth was 35%. It went from GEL 905 million to GEL 1.2 billion, and obviously, share shifted or share of private portfolio went up from 48% to 54%. So we had a big growth also in terms of 6 percentage point growth in terms of the share of the private portfolio in line with our strategy. So we are moving towards the -- our 80% mark slowly but surely. On Page 10, you see a breakdown of the NAV per share. We talk about NAV per share because this is our key metrics, and that's where we want to be measured how we perform in terms of the NAV per share growth and our target is around 20% NAV per share growth. And last year, which was off the target, it went up value by 5.7% NAV per share. But as I mentioned, this was driven by the listed assets, and to be more precise, by the GHG share price decline. So if you look at the development of the NAV per share, basically we started 2019 with GEL 44 NAV per share, and we had a negatively 2% effect by the listed assets and another 2%, we had -- from the GHG share exchange facility effects, so in total around 4.1% was the from the listed assets, negative. 10% value creation was on the -- contributed from the private assets. That's all is weighted, obviously, to their share. As I mentioned before, the private assets NAV per share grew by 20% plus. Buyback and cancellation program had a positive 3.2% contribution into our NAV per share growth. OpEx had a negative 2% and the liquidity management and FX, mainly here is the -- because we had a devaluation of lari, we had a growth of the value of the debt, and that is the mainly -- main effects to our NAV and the total negative 1.3%. However, as you see now, the lari is getting stronger. And as it seems like we will have a positive impact, if it continues like that in Q1 and the first half as well. So for this number of FX number may turn into positive. So in terms of the -- if you look at the NAV per share in terms of the -- in pound sterling, we are adjusted as of 26th of February, our NAV per share is GBP 12.86. Obviously, the Bank of Georgia's positive share price development this year had this impact of the NAV per share. It contributed 3.2% growth in our NAV per share. So that's where I stop now, and I let Giorgi to talk about our performance of our portfolio companies and the valuations we used for our portfolio companies, which are first time is audited, basically. -------------------------------------------------------------------------------- Giorgi Alpaidze, Georgia Capital PLC - CFO [3] -------------------------------------------------------------------------------- Thank you, Irakli. Hello, everyone. As Irakli mentioned, our valuations, the private valuations of portfolio companies have been audited by EY in [Handok], and this is the first time that it happened. On page -- starting on Page 13, where you will see a snapshot of fair values of each portfolio company as of December '18 and December 2019. But also, you will see the multiples for each business that were applied during the valuation process. I should highlight that there has been no change in methodology of how we value the private and public portfolio companies. As you know, public companies are valued based on the market prices and private portfolio companies are valued based on the valuations performed internally and then audited by EY. To summarize, Water Utility multiple remained the same during the year at 8.8. Property & Casualty Insurance business multiple expanded from 7.4 at the beginning of the year to 9x P/E at the end of the year. We have seen multiple expansion also in the wine business, where EV/EBITDA multiple expanded from 9.1 to 10x. And beer multiples that we apply, which is the sales multiple, remained the same at 2.2x. In terms of the pipeline, we had the first time valuation of auto services business, where an EV/EBITDA multiple of 10.4 was applied at year-end. Moving to Slide 14. Irakli already talked about the value creation in listed businesses. On this slide, you see the performance of the stock prices and also selected metrics of both Bank of Georgia and GHG businesses, who both continue to enjoy strong fundamentals. GHG had a double-digit revenue growth translating into 16.6% EBITDA growth, excluding IFRS 16. And as a result, their adjusted ROIC expanded by 100 basis points to 14.9%. I should also highlight that the cash flow generation in terms of the operating cash flow at GHG was up by 26% to GEL 125 million. Similarly, development CapEx was down by 45% during the year to GEL 29 million, and the free cash flow was up from GEL 14 million in 2018 to GEL 77 million in 2019. In Bank of Georgia, we would highlight that the loan portfolio growth continued to be very strong. The growth was 27% in 2019. And ROE (sic) [ROAE] was in excess of 26% for the full year, while the net profit grew by 32% to GEL 500 million in 2019. Now going into the Water Utility business, which is in Page 15. The revenues of -- the aggregate revenues grew by high single digit at almost 10%, actually, which was largely driven by the growth in the energy revenues, which more than doubled in 2019 from GEL 9 million to GEL 20 million. As a result, the EBITDA growth was 14%, and it increased to GEL 95 million for the full year 2019 from GEL 83 million the year before. The growth in EBITDA, while the market remained the same, resulted in the enterprise value growth of 13.5% to GEL 837 million. Net debt went from GEL 307 million to GEL 353 million but you should also note that Water Utility business paid GEL 22 million dividend during the year. To summarize, we had equity fair value growth to GEL 484 million, and the fair value accordingly, was up by GEL 53 million in 2019. So in total, we had a value creation of GEL 75 million in Water Utility, which is the sum of GEL 22 million dividend and GEL 53 million growth in the fair value of the business. In Housing Development business on Page 16, where we actually distribute very strong dividend of GEL 59 million during 2019. We saw that the Digomi project was launched in the second half of 2019 and the business starting to sell the first phase and the second phase of the project, as you know the project has 4 phases of the construction. However, there is a mismatch in terms of how revenues and the costs are recognized in the -- in this project. Revenue gets recognized as the project gets completed, while the expenses are recognized upfront, such as marketing expenses or sales expenses associated with the project launch. So in 2019, there was a mismatch between revenues and expenses, which we expect to be changed in the coming periods. In total, Housing Development business generated, in addition to the GEL 53 million that was created, generated GEL 35.6 million value creation, which was resulted on the back of the increased projected cash inflows from the pipeline of projects, including the Digomi project that I mentioned earlier. Slide 17, we have property and casualty insurance business, where we had the continuous growth in the net income of the business. Multiple, as I mentioned earlier, expanded from 7.4 to 9x, which resulted in the equity fair value growth from GEL 131 million to GEL 165 million. The business paid GEL 12 million dividends during 2019. And as a result, the total value creation in this business was GEL 46 million. In terms of the financial performance, the earned premiums continued to grow. The growth was almost 12% in 2019, and we have seen also a small pickup in the claims incurred, that resulted in the growth in the loss ratio from 38% to 42%, that's affecting the combined ratio. Going into the renewable energy, which is on Page 18. As you know, we launched the 30-megawatt Mestiachala hydro power plants towards the end of 2019. The remaining 20-megawatt is expected to become online by the first half of 2021. Meanwhile, the insurance company has confirmed the amount of the business interruption reimbursement, which is recognized within the financial statements already and is in process of remitting the funds to the business. As we mentioned earlier, the business acquired Hydrolea hydro power plant. And it also acquired the Qartli wind farm towards the end of 2019. In total, the business generated EBITDA of GEL 13.1 million, which was 81% EBITDA margin. Renewable energy continued to be valued at cost as of December 31, 2019, which was the acquisition prices of the Hydrolea and Qartli wind farm and the cost to build the Mestiachala hydro power plant. Slide 19 summarizes Hospitality & Commercial Real Estate business. Within the commercial real estate business, we continue to generate a gross yields of almost 10% in dollar terms on only commercial properties. We launched the Gudauri Lodge Hotel in December 2019, which added 121 rooms. And by now, we have 2 active hotels, which is Gudauri and Ramada Kazbegi in Tbilisi. We recorded GEL 22 million revaluation gains on hotels, which are nearing construction and the commercial assets during 2019. The NAV, as a result, was GEL 246 million, which was also positively contributed by the GEL 96 million capital allocations from Georgia Capital. Page 20. In wine business, the business had double-digit growth in revenues and in the EBITDA as well. And continued to increase its operating cash flow generation. We should highlight that the big export share in the business sales increased from 71% to almost 78% during 2019, while the business has also managed to diversify its export markets. As a result of the growth in the EBITDA, the enterprise value has increased to GEL 95 million and the equity fair value of the business was GEL 72 million, which was up by 27% from GEL 57 million a year before. Page 21 in beer business, we would highlight that the turnaround continued, and the business managed to generate breakeven EBITDA in the second half of 2019, which was in line with our expectations. Enterprise value increased significantly from GEL 61 million to GEL 104 million while the multiple remains the same. That was driven by the growth in the revenues where the project -- where the revenues of GEL 47 million represents 68% growth on a year-over-year basis. And the last business I will talk about is the periodic inspection business, which we launched about 12 months ago and has been operational to us for 10 months in 2019. The business had generated revenues of GEL 13 million and had an EBITDA of GEL 3.2 million, which is 25% EBITDA margin. The business has 51 inspection lines across Georgia and has 36% market share. In terms of valuation, we apply 10.4x EV/ EBITDA multiple to last 6 months EBITDA for 2019 because the business was not fully operational and to projected EBITDA for the first 6 months of 2020. As a result, the enterprise revenue was GEL 70 million, net debt of GEL 49 million, resulting in the equity fair value of GEL 21 million. We have allocated GEL 5 million to this business, and therefore, the value creation here was GEL 16 million. With this, I will hand it back to Irakli. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [4] -------------------------------------------------------------------------------- Thank you, Giorgi. Thank you. Very good overview. Let me summarize that we expect 2020 to be a strong macro growth to continue. As we believe that -- not believe, I mean, that's in budgets we have, the government is spending quite a hefty amount in infrastructure. Last year, we did not have a growth of the tourist revenue, it was flat. This year, we expect the growth there. We also expect that exports to grow as we see the momentum in terms of the free trade agreement with EU is stepping up. We also see share of the renew, now our economy growing rapidly. And that will -- that seems like it will continue. Georgia's diverse economy is actually a bigger -- a big plus. In terms of the -- in terms of this exit, basically, we are -- we want to institutionalize the exit, and we recently appointed a Chief Exit Strategy Officer, Ia Gabunia, which is will be working with us for a while on different investment projects. But the message I want to give is we are -- we want to institutionalize the exit process as our GCAP product is the final (inaudible) investment, which we -- which will create the value we create, and this needs to be realized. And therefore, we will be monitoring the exit side of the business pretty closely. Here, I will finish talking, and maybe it would be good to have a Q&A session now. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And your first question comes from Maria Kolbina from VTB Capital. -------------------------------------------------------------------------------- Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst [2] -------------------------------------------------------------------------------- A few questions from me. So the first and most important question from our side refers to Georgia Healthcare Group. Can you provide some strategic thoughts on how you plan to manage this asset? What does increase of stake due to the recent swap gives you? And why actually you decided to do it from the strategic standpoint of consolidation of shares in Georgia Healthcare, 50% allowed you to basically do a number of things that you wanted on the strategic front. So what is the key crossread and should we expect further increase in your interest in the health care business? So that's the first question. And the second question, can you, like, sum up basically the 2, 3 industries where you see the key growth? I want to say that education. So can you provide some thought on that. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, Maria, for the question. And GHG is basically, we had a share exchange program, which we saw the high demand. We had to allocate only 44% of the demand, unfortunately. And that's basically as further as I can comment on in GHG. In terms of the growth opportunities, we have a number of growth opportunities. Firstly, we like education, as you mentioned, business very much. We see a big demand. Growth is there. We also see -- we also have a very strong pipeline in education. And we are in a [chosen peak moat] there. We like the business itself as it's asset-light and heavy -- asset-light and higher-margin business in general. With another kind of a big growth where we see is energy. These are the probably 2 best sectors we would be happy to allocate more capital and probably, basically these are the kind of our, I would say, our flagship sectors. In energy, we have a big growth in demand. What we like about energy is also, just to give you one number, it's only 10% penetration we have of the air conditioners, and this is a tourist country. And if you compare to other tourist countries with less heat, for instance, Croatia, which is a tourist country and heat in Croatia is much less than in Georgia, the penetration is 46% there of the air conditioners and if the penetration even doubles , we will have a -- we have to grow, demand will grow by 30%. So I think as we think that energy is basically only the [simple] numbers, we can give you more granularity. But I think that that's the kind of -- makes the energy business very, very attractive. We also like the insurance business in general because penetration is very low. And we think that this -- the penetration will pick up as mandatory lines are coming up and [we use] the capital is increasing, we think that this only -- you only have like not even 50,000 cars insured in Georgia. So we think if the penetration pickup, the insurance would be very high. We also like Water Utility business, and we saw a stellar performance from our Water Utility company. And the best thing about the Water Utility company is that, as you save the -- as you are becoming more efficient in terms of use the energy, you – we'll also generate the revenue on the hydro side [origin] value, which is attached to our Water Utility company. So we have like a double bonus. If you are efficient, you get double bonus and that's what we like. So the [PR] business is overall is very crowded as a market, and we need to make some kind of resolution there, for sure. By the way, the wine is also very interesting for us. We had a big growth in wine business, sales went up nearly 44%. We expect another very high-growth in the wine because we have already contracted -- we have a very strong contracts which been signed so we expect extremely good performance on the wine side. And I think that on wine, we have a -- we have been -- we have allocated the capital in the vineyards and the cost of goods sold has been pretty much contained going forward. So not much of the capital will be allocated on the wine side, it's been always allocated. We'll be observing and seeing a growth of the average total price. That's what's kind of a -- what we think will happen going forward. I guess, I'll stop here. Thank you, Maria. -------------------------------------------------------------------------------- Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst [4] -------------------------------------------------------------------------------- Okay. I would say that the first -- the second answer was very detailed. I'll come back to the first question. So let me rephrase it. When should we expect more updates on your management of Georgia Healthcare business and some future prospects of this company, given the consolidated market share. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [5] -------------------------------------------------------------------------------- I think GHG is updating every quarter their investors. So on -- they had -- last week, they had the results call. -------------------------------------------------------------------------------- Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst [6] -------------------------------------------------------------------------------- But due to the increased stake of Georgia Capital in Georgia Healthcare, you don't actually, at this point of time, ready to communicate new updated strategy, if any. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [7] -------------------------------------------------------------------------------- That's what I said, basically, I can't comment any further. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from Henrietta Seligman from Somerset Capital. -------------------------------------------------------------------------------- Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [9] -------------------------------------------------------------------------------- I've got a few questions. The first one is how much do you expect to allocate to new investments over the coming year? Or how much capacity is there to allocate to new investments? The second question is on the insurance business. How are you pricing the new business? And has the sort of average pricing change since mandatory cross-border insurance came in? And then could you just explain a bit what caused the deterioration in the loss and expense ratios? And then on -- I've got a couple more, but I can come back to them. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [10] -------------------------------------------------------------------------------- Sure. Thanks, Henrietta. So on the capacity investments, we have a very strong position in terms of the cash position. We have a GEL 360 million of cash and equivalents. And basically, currently, we are updating our capital allocations as we will be raising third-party money and some of the allocations may drop out. But basically, our view is that 2020 will be not very active in terms of investments. We will be more focusing on the -- further improving the efficiency of our portfolio companies. We see that there is a room, big room for improvement. Even though we had a very good performance of value creation on private side of the business, we think that, that value creation can be even further enhanced. So our focus will be more on the improvement of operating performance rather than investments and allocation, allocating capital. So 2020 is not -- it will be kind of slow in terms of the investment. In terms of the insurance, insurance side of the business, we had a higher loss ratio due to environmental impacts, basically, for instance, that we had a -- the hydro was flooded, a landslide. So we had the claims have been increased further. So that was the main driver of the insurance underperformance. We have some a little bit margins with this on some of the products but overall, insurance is on track. And I would say it had a bad year in terms of the claims. -------------------------------------------------------------------------------- Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [11] -------------------------------------------------------------------------------- Okay. And any change in the pricing there, now that you've got the mandatory insurance of cross border? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [12] -------------------------------------------------------------------------------- So right now, that really did not change the pricing yet. We -- it's only border crossing. We will be having a TPL of -- for the whole country, most likely, kicking in in 2021, in the beginning of 2021. And there, we will be expecting a pickup in the [Cosco] insurance. As people will be buying the mandatory lines, they have to buy mandatory lines will help opportunity to upsell to Cosco . And our PTI is also very important in that exercise. -------------------------------------------------------------------------------- Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [13] -------------------------------------------------------------------------------- Understood. And then I just had a couple of other questions. So on the housing business, what exactly are the construction revenues for? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [14] -------------------------------------------------------------------------------- The construction revenues are mainly -- we are doing the third-party construction. We have a construction company within the housing development, and we are doing the third party construction, for instance, this Korean company completed the shopping mall last year, for instance. It also had completed a (inaudible) collection hotel last year. That's third-party revenues we are receiving. -------------------------------------------------------------------------------- Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [15] -------------------------------------------------------------------------------- Okay, great. That's it for me. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [16] -------------------------------------------------------------------------------- Thanks, Henrietta. Take care. -------------------------------------------------------------------------------- Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [17] -------------------------------------------------------------------------------- And actually -- sorry, if I might, just on that. So just to clarify, you're not booking revenues of any construction that you're doing for your own projects, it's just the third-party ones ? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [18] -------------------------------------------------------------------------------- Yes. Yes, it's third-party. (inaudible). -------------------------------------------------------------------------------- Giorgi Alpaidze, Georgia Capital PLC - CFO [19] -------------------------------------------------------------------------------- No, so this also includes our hotel construction. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [20] -------------------------------------------------------------------------------- [Five] hotels. -------------------------------------------------------------------------------- Giorgi Alpaidze, Georgia Capital PLC - CFO [21] -------------------------------------------------------------------------------- Yes, some, but mainly is the third parties. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- (Operator Instructions) And your next question comes from David Shapiro from Vanshap Capital. -------------------------------------------------------------------------------- David Samuel Shapiro, Vanshap Capital, LLC - Chief Compliance Officer [23] -------------------------------------------------------------------------------- Just a few questions here. On the utility business, I think you go into tariff negotiations at some point. Any early indications on where they're going to stand roughly or some rough outlines of expectations on where that's going to compare versus where you've sat for the past 3 years or 2.5 years, I guess. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [24] -------------------------------------------------------------------------------- Sure. So basically, on tariffs, we had a renewed investment plan approved by the regulator. So we are in line -- this makes the tariff even more certain. But -- so basically, our expectation on tariff increase so far is in line. We have no changes there. -------------------------------------------------------------------------------- David Samuel Shapiro, Vanshap Capital, LLC - Chief Compliance Officer [25] -------------------------------------------------------------------------------- Which would be roughly what level versus where it is currently? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [26] -------------------------------------------------------------------------------- I'm -- so basically, it's really the corporate and retail, so we cannot really comment on details there. But what we have here is that investment plan approval is that -- was pretty smooth when the disposal we are -- so we are in line with that. We are expecting the ROIC to grow. That's what I can comment on from current 12% level to 14% level over the next 2 years. -------------------------------------------------------------------------------- David Samuel Shapiro, Vanshap Capital, LLC - Chief Compliance Officer [27] -------------------------------------------------------------------------------- Okay. And then you have a new Exit Chief, I guess, or new unit, I guess. So clearly, you guys intend to focus on realizations and exits, which areas would you say are most primed or fruitful for that type of activity? And would you think something would be possible in what time line, roughly speaking? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [28] -------------------------------------------------------------------------------- I think, David, that is a very kind of early for me to comment on that one. But basically, the message we want to give is we are -- we have not been that focused on the exit side of the business in terms of the exit strategy was always important, but I think that we need to think differently, and we need to be more focused. We need to be more out there in the market, and we need to be all the time, test the other pricing, what the pricing of our assets are. It doesn't mean that we will be selling directly, but basically, we need to be out there to sneak around and get the feeling for our price while we're at it. I won't disclose something going to happen within this year. But I will say it's such an unpredictable one, but it's for me to speculate on that, I don't think it's going to be fruitful. -------------------------------------------------------------------------------- David Samuel Shapiro, Vanshap Capital, LLC - Chief Compliance Officer [29] -------------------------------------------------------------------------------- Okay. Next question, you mentioned some of the areas you're most excited about. I think notably lacking, and I wanted to -- I guess one area of concern I wanted to ask about, at least from our point of view, is the hospitality business. It seems that NOI is quite flat and the amount invested in the first hotel, at least, was quite significant relative to what's being generated right now. I'm wondering if the company is limiting additional capital flows. It seems to be a capital hog of a business, and I'm wondering what the plans are for that segment, the hospitality in particular? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [30] -------------------------------------------------------------------------------- So basically, the hospitality side of the business, I think, is a very early stage, what we are looking at. And I think we are very bullish on Tbilisi in general. So what you are looking, you are looking at Tbilisi numbers, and we will be probably, when we talk about it, we will be more prone to exit some of the Tbilisi hotels basically and more focus on the regions outside Tbilisi, where the penetration of the hotels is almost nonexistent in some of the areas in the Georgia as well. So we will be -- we think -- we want to reallocate the capital from Tbilisi hotels to the regional hotel. That's what we think we should do. I think in general, the Georgia's hospitality penetration is extremely low and it is bound to grow. The EU, for instance, tourist growth rate was 47% in January, for instance. We had a 78% growth in Israel and Georgia is just emerging as a tourist country. And it's a very early stage of that. That is our bet also on this whole thing. So we are looking Tbilisi penetration is high, and we are looking at every stage of the tourists. That's maybe the reason why we don't like the tourists at this stage. -------------------------------------------------------------------------------- David Samuel Shapiro, Vanshap Capital, LLC - Chief Compliance Officer [31] -------------------------------------------------------------------------------- Okay. And then just lastly, on the capital allocation, it sounds like you're still trying to formulate your plans and that maybe it's going to be a bit thinner than it has been in the past to adding to your subsidiaries. Without being too specific, in general, is your view on stock repurchases still the same, where if you have spare capital, is it still your view that if there's a large gap in valuation, that's still an attractive use? Or do you feel differently about that? Do you feel dividends? Or any changes to the strategy, I guess, is what I'm asking. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [32] -------------------------------------------------------------------------------- No changes there in strategy. As I explained, our NAV per share in pound terms is around GBP 12.8, which basically currently our share price is trading at a hefty discount. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Your next question comes from Nikolay Kovalev from VTB. -------------------------------------------------------------------------------- Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [34] -------------------------------------------------------------------------------- I have a question on your exit strategy because back in June during the Strategy Day, you mentioned a pretty clear approach to exit for each of your assets and also mentioned that listed portfolio should go down to some 20% of total in 5 years. So I was wondering after the share exchange program, does somehow the strategy changes and what your most preferred exit approach to GHG at the moment. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [35] -------------------------------------------------------------------------------- We are -- basically, I think the 5-year plan and the current plan is that currently what we are doing is maybe doesn't coincide because the 5 years that's what our plan is. So if you look at our numbers, penetration wise so we had a pickup of 6 percentage point penetration in the private portfolio increasing as the total share that's basically a direction which we want to look. In terms of the exit strategies, in general, I think today's results, we, as an investment company, which basically consist of these 3 stages of how we develop our product. We buy or we do greenfield. We invest in greenfield. We grow. We institutionalize it. We bring the management by bringing good management teams, et cetera, and then the exiting. Right now, basically, we have only 2 pieces of the puzzle. So basically, as a material, we need to further institutionalize the exit. And that's basically -- that's what we are flagging to our investors that we are aware of that, but we need to be more open and more systematic how we exit and what we do. Right? That's basically about it. -------------------------------------------------------------------------------- Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [36] -------------------------------------------------------------------------------- And for GHG, is it like somehow the approach changes now on? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [37] -------------------------------------------------------------------------------- No, no. I think that we have a change. So basically, [I have in the summer of] we have different things with -- we will update you if we change something, if we have a change in strategy. We have a 2018 5-years' time and it stays like that. So if it changes, we will let you know. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Your next question comes from Bram Buring from Wood. -------------------------------------------------------------------------------- Bram Buring, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [39] -------------------------------------------------------------------------------- A lot of my questions have already been asked, but I would please ask you on the Water Utility, when do you expect the regulator to announce the full details in the next period. So [RAB], your planned investments and the [WAC]. And yes, that's really about it at this point. -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [40] -------------------------------------------------------------------------------- Yes. Thanks, Bram. The Water Utility business, basically as you know, the cycle is 3-year. You know we have a 3-year cycle. December 2017, the tariff and [WAC] was approved, and the next cycle comes in December 2020. So we expect in December 2020, the new tariffs and the WAC to be announced. -------------------------------------------------------------------------------- Bram Buring, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [41] -------------------------------------------------------------------------------- So not until the end of the year, actually? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [42] -------------------------------------------------------------------------------- No, not end of the year. -------------------------------------------------------------------------------- Bram Buring, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [43] -------------------------------------------------------------------------------- Yes. I mean, I'm going to ask about share buybacks. You have continued some of them. Is there at this point, any pool of cash set aside for buybacks for the rest of this year that we could talk about? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [44] -------------------------------------------------------------------------------- We are sitting on hefty pool of cash, and we will update you as we go along on this side. We -- as I mentioned, we understand that the discount has widened. And let us give you update on that side of the business. -------------------------------------------------------------------------------- Bram Buring, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [45] -------------------------------------------------------------------------------- Okay. Yes. And then one last tiny question. You're talking about the mandatory road insurance in Georgia. Has the government actually signed that into law that it's going to start from 2021? -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [46] -------------------------------------------------------------------------------- So basically, this is the mandatory insurance of the cars, basically. So that one is in a pretrade agreements with Euro, the Commission. So because we have this pretrade agreement, as part of that there are a number of things that Georgia needs to do, as one of them is the car insurance. And I think the deadline was end of 2020. But I think they are pushing towards '21. That's what we are hearing. It's not the lower. It's a commitment by the -- with the new pretrade agreement review. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- There are no further questions at this time. (Operator Instructions) -------------------------------------------------------------------------------- Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [48] -------------------------------------------------------------------------------- Since there are no further questions. Thanks, everybody, for joining our call. We are excited to continue the journey of the Georgia Capital and continue the value creation path. Thanks and please stay tuned. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.