Financial Year 2021/22 – Full Year Performance

Chief Executive Officer’s Review

Hemas Holdings PLC (HHL) accomplished a solid performance for the financial year 2021/2022 despite a challenging environment, to record a cumulative Group revenue of Rs. 78.8 billion, an increase of 22.2 per cent over the prior year. The overall cumulative operating profits of Rs 6.8 billion reflected a growth of 11.9 per cent over previous year, whilst the Group earnings of Rs. 4.2 billion is an increase of 30.6 per cent. The first half performance was hindered by the island wide lockdowns stemming from the rapid spread of the Delta variant. Whilst the second half presented unprecedented challenges in terms of foreign exchange liquidity, unsustainable government debt, currency depreciation, volatility in global commodity prices, soaring inflation, and rising interest rates. In such extreme adverse operating conditions, the country spiralled into an economic crisis, resulting in supply disruptions of essentials such as power, gas and fuel which led to civil unrest amidst high inflationary pressure.

In the backdrop of economic and political instability, anchoring on its strength of operating in defensive industries coupled with strong liquidity position, HHL continued to stay agile resulting in the reaffirmation of “AAA (lka)- Outlook Stable” Fitch rating for the Group, for the third consecutive year.

Strong performance in Home and Personal Care (HPC) Sri Lanka, Learning Segment and the Healthcare sector drove revenue growth of 27.2 per cent for the quarter over the same period last year. However, the operating profit growth was restricted to 16.0 per cent with the intensifying pressure on margins across most of the businesses due to input cost inflation and challenges relating to foreign exchange volatility. Group recorded an operating profit of Rs. 1.5 billion for the quarter over Rs. 1.3 billion recorded last year. The earnings growth of Rs. 203.0 million is an increase of 23.6 per cent over the same period last year.  Earnings per Share improved to Rs. 7.12 from Rs. 5.46.

Despite internationalisation being a key focus, the continued political and economic unrest in Myanmar resulted in the Group making a strategic decision to exit from its operations in Myanmar during the quarter for a consideration of Rs. 223.3 million.

Consumer Brands

Consumer behaviour and consumption patterns were influenced by the changes in the macroeconomic environment, with Sri Lanka witnessing over 20 per cent inflation during the latter part of the financial year. Basket values were tilted towards food and essentials leading to a contraction in demand for non-essentials.

The operating environment of Bangladesh was relatively favourable with the number of COVID-19 cases declining towards the latter part of the quarter despite the vaccination rate being slower than most regional peers. Inflation rates rose over 6 per cent, with the prices of both food and non-food items rising rapidly during the year.

The quarter witnessed an increase in demand for stationary with the back-to-school season being shifted to April. During the year, the industry faced multiple challenges on the back of rising paper prices and subsequent difficulties in accessing foreign exchange for imports, with paper being considered a non-essential item. The likelihood of future price increases resulted in a spike in consumer purchases in the fourth quarter.

Cumulative revenue for the Consumer Brands sector was Rs. 30.8 billion, an increase of 22.8 per cent over last year. Notwithstanding the margin pressure, underlying volume led growth and continued focus on efficiency improvements resulted in the sector reporting an operating profit of Rs. 3.0 billion for the year compared to Rs. 3.3 billion recorded last year. Accelerated focus on expanding its footprint overseas resulted in HPC Sri Lanka and the Learning Segment achieving 17.1% year-on-year growth in export revenue.

The Sector recorded a revenue increase of 41.8 per cent for the quarter compared to same period last year stemming from the improved performance of HPC and the Learning Segment. Market share improved across all key categories of the sector. Despite the steep depreciation in the exchange rate depreciation, rising commodity prices and high inflation, the operating profit for the quarter increased to Rs. 830.9 million compared to Rs. 741.0 million recorded same quarter last year.

Home and Personal Care

HPC Sri Lanka recorded a volume led growth in both modern and general trade channels in comparison to the previous year, which was reflected in year-on-year market share gain. Our strategies on offering innovative products to the market were proven fruitful with new launches and relaunches of all key brands gaining considerable traction in the market resulting in a 14.4 per cent contribution to the cumulative revenue of the business.

Sharp increases in raw material cost along with foreign exchange liquidity pressure and currency depreciation required the business to cautiously review pricing strategies and portfolio choices throughout the quarter. The team continues their commitment to implement optimum strategies to maintain the balance between margin pressure and reducing the burden to consumers due to inflation.

HPC Bangladesh recorded steady performance during the quarter with over 12 per cent volume growth whilst improving market share by over 3 per cent. Actisef, a personal wash brand introduced last year, has established itself in the market with all key products gaining traction. Quarterly revenue contribution from new launches across the business stood at 16.9 per cent.

Learning Segment

With the back-to-school season being shifted to April, this segment had an exceptional quarter with all key categories winning market share with double digit volume growth. Recent launches and relaunches under the brands Atlas and Innovate both gained momentum in the market. Constant effort to build consumer centric brands coupled up with our strategy on differentiation, positively impacted the company’s contribution to the Sector.

Healthcare

With the decline in the number of COVID-19 cases, Hospital sector recorded an increase in footfall for both inpatient and outpatient visits. A slowdown in COVID-19 related revenue was also experienced during the fourth quarter the sector while improved digital adoption across the Healthcare sector supported the increase in demand.

The sector posted a cumulative revenue of Rs. 46.1 billion, a growth of 23.8 per cent over last year. Both, Hospitals and Pharmaceuticals Businesses collectively contributed to the strong performance of the sector. Operating profit and earnings of Rs. 3.6 billion and Rs. 2.6 billion for the year, was an increase of 24.6 per cent and 34.9 per cent respectively.

The sector recorded a revenue of Rs.12.4 billion for the quarter whilst operating profit and earnings stood at Rs. 885.7 million and Rs. 638.0 million respectively. The growth in profitability was primarily driven by the robust performance in Hospitals with the pick-up in surgical revenues. However, overall profit margins continued to be impacted due to challenges related to currency.

Pharmaceuticals

Pharmaceutical Manufacturing, and Distribution delivered a robust performance during the quarter leading to a cumulative double-digit year-on-year revenue growth of 40 per cent.

As a reactive response to the sharp currency volatility, the National Medicine Regulatory Authority (NMRA) approved consecutive price increases for controlled molecules during the fourth quarter. The pharmaceutical industry which is primarily import dependent experienced immense pressure as the industry struggled to meet their commitments due to the foreign exchange liquidity crisis. Further the exchange losses absorbed owing to the steep depreciation of the rupee was compounded by the absence of a transparent pricing mechanism. In such trying circumstances, as a responsible corporate, leveraging on our partnerships with leading principals, the team collaborated with all key stakeholders to ensure the continuous availability of critical medication in the market.

While continuing to stress the importance of the Government having an equitable allocation of buy back for local manufactures, Morison pursued multiple alternate ventures including branded generics and contract manufacturing to reduce the dependency on buyback agreements. Empamor, the first locally manufactured Sodium-Glucose Co-Transporter-2 (SGLT2) inhibitor in Sri Lanka, introduced last year was well received by the market and variants of 10mg and 25mg were launched during the year. During the quarter, Morison also launched Glucomile, a hundred per cent glucose monohydrate which provides an instant energy boost to sustain performance at an optimum level. During the quarter our Flag ship Manufacturing plant in Homagama obtained approval for commercial Manufacturing.

Hospitals

During the quarter Hospitals witnessed an increase in patient footfall and the occupancy improved to over 55 per cent at both the Hospitals. Similarly, surgical admissions reported a 10.1 per cent growth. Digital and lean initiatives along with the revenue mix resulted in an annual operating profit margin improvement of 5 per cent.

Mobility

Annual total throughput volumes and transhipment volumes of the Port of Colombo increased by 8.1 per cent and 7.3 per cent in comparison to last year. The increases in freight rates globally partially negated the negative impact of the Maritime business which witnessed volume drops, with vessels continuing to skip Sri Lanka to recover the schedules.

Foreign exchange liquidity constraints of the country had an adverse impact on the Aviation industry with market players facing challenges in repatriating revenues to their principals. Aviation achieved double digit growth in revenue and profits during the quarter as the passenger revenue continued to surge since the third quarter. Meanwhile, strong global connectivity across continents enabled cargo also to report enhanced volumes, especially in the outbound segment, where 51.8 per cent volume increase was noted compared to the previous year.

The Mobility Sector reported a cumulative underlying revenue and operating profit of Rs. 1.3 billion and Rs. 889.2 million (adjusted for the sale of Spectra Logistics) in comparison to the last year comparative of Rs 1.1 billion and Rs. 484.2 million. Both the Maritime and Aviation contributed to the growth in performance. Despite the 3.4 per cent decline in underlying revenue, underlying earnings for the quarter increased by over 100 per cent to Rs 303.8 million over same period last year due to exchange gains.

The logistics segment remains a strategic focus area with the Group pursuing opportunities to leverage its existing capabilities to grow in this space.

Our Commitment to ESG

The Group has in place a sustainability management framework based on identified material topics and continued to monitor its key sustainability and risk indicators in adherence to internal sustainability SOP’s

During the quarter, the Group strived to reduce its environmental impact through various initiatives across its operations. The carbon footprint per million Rupees of revenue decreased by 13 per cent and water withdrawal per million Rupees of revenue decreased by 32 per cent over last quarter.

As a part of our effort to address marine pollution in Sri Lanka, the Group partnered with the Marine Environment Protection Authority and have placed an ocean strainer trash trap in Galle and launched four beach caretaker projects. Through this initiative the Group strives to keep over 16,000 kg of plastic out of the ocean annually and assist in the conservation of Sri Lanka’s threatened and degraded marine ecosystem.

Our social commitment to champion inclusivity and eliminate inequality saw our flagship project Piyawara commencing the construction of its 60th Piyawara preschool in Wadinagala, Ampara District. In addition, Hemas Consumer Brands took a bold step forward in breaking the stigma on menstrual hygiene by launching a company-wide initiative to distribute free sanitary napkins to both female and male employees, a first by a corporate in Sri Lanka. The initiative encourages both genders to actively seek answers to the issues faced by women due to period poverty

Outlook

This financial year has been one of the most testing years for our nation and the Group. I am pleased that once again, Hemas has showcased its strength as being resilient to deliver exceptional results in a challenging operating environment. In the coming financial year, we expect the operating environment to remain volatile.

We are cautious about the next two quarters given the current crisis and the impact it would have on businesses. However, being in defensive sectors coupled with a strong core, we have faith in our team to successfully navigate the macroeconomic headwinds. We call out for a stable political environment and prudent economic and fiscal policy reforms as the national economy envisages to recover under a solid programme with the International Monetary Fund.

We have aligned our strategies and resources in the short run to stay agile and robust by strengthening our core business and improving market share. We will continue to focus on our business models and cost optimisation initiatives while improving efficiency by building on digital capabilities. The Group will also accelerate expanding our footprint into export markets, with greater emphasis placed on our international business. Developing our presence in the Mobility sector will be another key priority in the medium term.

I extend my sincere appreciation to the team at Hemas, for being agile amidst a challenging quarter. Their passion and commitment in overcoming challenges is commendable. Our sincere gratitude to all the stakeholders for their active role in partnering with us to bring out meaningful outcomes. We will continue in our journey to ensure that we serve the needs of our nation and live our purpose of “Making Healthful Living happen”.

Kasturi C. Wilson

Group Chief Executive Officer

May 19, 2022

Colombo