November, 10, 2021
Chief Executive Officer’s Review
Financial Year 2021/22 – First Half Performance
Hemas Holdings PLC (HHL) delivered a strong first half amidst a challenging operating environment with half of the second quarter being under island wide lockdown. The cumulative Group revenue stood at Rs.36.2 billion, an increase of 19.8 per cent over last year. During the quarter under review, an unprecedented level of input cost inflation and foreign exchange volatility resulted in the Group witnessing profitability pressure. The overall cumulative operating profit of Rs.2.6 billion remained constant over last year whilst the Group earnings of Rs.1.6 billion is an increase of 1.7 per cent.
During the quarter, underlying business grew by 14.7 per cent over last yearMeanwhile, new revenue streams across businesses grew over 100 per cent whilst contributing to 7.5 per cent of the total Group revenue. The Group operating profit and earnings of Rs.1.5 billion and Rs. 944.1 million saw a year-on-year decline of 23.9 per cent and 26.6 per cent respectively, underpinned by the cost inflation.
The company declared an interim dividend on October 15, 2021 of Rs.2.90 per ordinary share.
The pandemic continued to influence consumer behaviour, sales mix and market channel dynamics. Footfall in the modern trade was impacted during the lockdown whilst general trade saw a stable growth. Basket value was skewed towards food and essentials, impacting shopper patterns for non-essential items. The quarter witnessed escalation in commodity prices by approximately 50 per cent over last year.
Operating conditions in Bangladesh continued to be challenging, with the quarter impacted by lockdown restrictions which were lifted in mid-August.
Trade union action of teachers and principals in the past three months affected online teaching at all government schools, adding more pressure to the prolonged closure of schools.
The Consumer Brands sector recorded a cumulative revenue of Rs.12.8 billion, a growth of 13.3 per cent over last year. However, sector cumulative earnings of Rs.727.8 million witnessed a year-on-year decline of 10.3 per cent.
During the quarter, the Consumer Brands sector recorded a revenue of Rs.7.3 billion, a decline of 1.8 per cent compared with the corresponding quarter in FY 2021. Revenue contribution mix within the sector remained in line with last year. Home and Personal care (HPC) segment continued the growth momentum witnessed last year, although Atlas growth was subdued. Sector earnings of Rs. 497.6 million witnessed a year-on-year decline of 40.4 per cent, primarily due to raw material price inflation in the HPC business segment.
Home and Personal Care
HPC Sri Lanka delivered a steady double-digit volume-led growth. The launch of Dandex and Kumarika shampoo buddy packs to provide an affordable and sustainable alternative to single use sachet packets enabled a first mover advantage with double digit volume growth and increased market share. Similarly, the recent launches and relaunches have been gaining good traction.
In an on-going effort to expand the Group’s presence in the beauty and personal care category, HPC Sri Lanka launched a new brand “Vivya” in the face care segment, a unique product innovated from the extract of Sri Lankan Heirloom rice.
Sector profitability was impacted due to steep increases in raw material cost along with exchange rate volatility. In an ongoing effort to reduce the burden to consumer from the inflationary impact, we have adopted multiple strategies whilst continuing to prudently manage cost for margin recovery.
HPC Bangladesh quarterly revenue remained constant over both last year and last quarter. However, cumulative revenue witnessed a high double-digit growth anchored around a similar trend in volume growth over last year with new products kicking in. Revenue from new launches stood at 9.2 per cent. Driving new revenue within the Value-Added Hair Oil (VAHO) segment, HPC Bangladesh launched Eva hair oil, an entry point value added hair oil. Amidst a constant revenue, profitability growth remained steady as a result of efficiency improvements.
Atlas continued to gain market share across all key categories including books and colour products over last year. The introduction of themed based notebooks under its “Innovate” range, enabled the company to be listed in the super premium stationery category at leading retail outlets. This is despite the limitations faced in consumption owing to the trade union action of teachers and principals during the quarter under review. Atlas contributed approximately 30 per cent to the Consumer brands sector revenue during the quarter with the kick-off of seasonal sales ahead of the school season in 2022.
Market Demand for healthcare services and medicines increased during the peak of COVID cases. However, overall footfall of non-COVID patients dropped by more than 50 per cent at all private hospitals. The COVID-19 pandemic saw the acceleration of digital adoption across the healthcare sector and as a result, e-chanelling and e-pharmacies witnessed an increase in demand.
The Healthcare Sector reported a cumulative revenue of Rs.22.2 billion, a growth of 23.6 per cent over last year whilst sector profit of Rs.1.8 billion was a 15.6 per cent growth over last year.
Hemas Healthcare Sector posted a revenue of Rs.11.8 billion whilst operating profit and earnings stood at Rs.994.6 billion and Rs.736.8 million respectively for the quarter. Performance was broad based with all sectors growing competitively over last year and last quarter, amidst island wide lockdown being imposed for more than half the quarter. Steep exchange rate volatility resulted in profitability pressure.
Pharmaceutical businesses delivered a stable revenue growth during the quarter. However, the reduction in buy back volumes compared to assigned quantities under the guaranteed buy back agreement with the Ministry of Health Sri Lanka, impacted overall performance. Pharmaceutical manufacturing arm, Morison reported a steady cumulative growth of 34.2 per cent in revenue, driven by increased private market sales, excluding buyback volumes.
In its continuous efforts in excelling at manufacturing, Morison became the largest manufacturer in terms of volume (No of tablets) under IQVIA results for the quarter ended September 30, 2021.
Myanmar distribution operations witnessed a quarter-on-quarter recovery in revenue although profitability remains a challenge as a result of the political unrest and currency depreciation.
Hospitals witnessed an average increase in admission volumes by 4.4 per cent over last year with a fair mix of COVID and non-COVID medical admissions for the first half.
Thalawathugoda and Wattala recorded an overall occupancy of 60.7 per cent and 58.6 per cent respectively. Additionally, demand for diagnostics experienced a surge with outer laboratories increasing revenue and profitability during the quarter. Lean initiatives further strengthened the robust profitability improvement on the back of increased surgical revenue by 14.6 per cent, reporting an EBITDA margin increase of 3 percentage points against last year.
With the acceleration of digital adoption, Hemas partnered with IFC, envisioning an integrated Digi Health eco system to uplift healthcare access and efficiency.
Transhipment volumes and TEUS dropped by 7.5 per cent and 6.1 per cent during the quarter in comparison to same period last quarter resulting from over 250 vessels skipping POC to recover the schedules. Additionally, freight rates hike partially negated the adverse volume impact.
The Mobility Sector reported a cumulative revenue of Rs.1.2 billion, a growth of 23.3 per cent over FY 21 whilst sector profit doubled to reach Rs.471.9 million for the first six months ended September 30, 2021.
During the quarter, Mobility Sector reported a revenue of Rs.595.0 million whilst operating profit and earnings stood at Rs.230.2 million and Rs.73.0 million respectively.
HHL divested its interest in Spectra Logistics in October. In line with the Groups’ strategy, Mobility sector will focus on investing in the logistics segment, in a model which enables us to leverage on existing capabilities.
Our Commitment to ESG
Our increased focus in responsible plastic manufacture and disposal practices resulted the Group partnering with the Ministry of Environment to support its ‘Not a Rule but a Discipline’ initiative that promotes recycling of plastic waste in Sri Lanka to minimize the impact on landfills. This initiative complements our Environmental Agenda which also strives to protect and nurture the eco system and actively pursue the use of natural resources in a responsible manner.
Our social commitment to champion inclusivity and eliminate inequality saw our flagship project ‘Piyawara’ laying the foundation stone to its 59th pre-school in Damana. Atlas, through its Sip Udana initiative ensured uninterrupted learning during the pandemic by carrying out activity-based programmes focused on primary school children and teachers to be exposed to modern ways of learning along with facilitating grade 5 scholarship seminars online. Our national campaign Sonduru Diriyawanthi, was launched to empower women who are undergoing chemotherapy by addressing the increasing need for natural hair wigs.
Doing our part in building a healthier Sri Lanka, Hemas Hospitals launched Meducate, a medial webinar to support the fight against COVID-19 by uplifting the knowledge of General Practitioners on managing COVID-19 Patients in their practice.
Against a challenging operating environment, I am encouraged by the progress we have made in the first half of the year. Although we anticipate improved demand trends as mobility levels increase with the reduction of COVID-19 infections and accelerated vaccination drive island wide, headwinds from higher global commodity costs, inflationary pressure in Sri Lanka coupled with numerous pressures on foreign exchange will likely have margin pressure across all entities in the upcoming quarters. We will continue to execute our strategies for margin recovery. We will be accelerating other alternative opportunities to de-risk Morison from the volatility of the buyback agreements. During the quarter, our new oral solid dosage manufacturing plant obtained the GMP approval and the commercial production is expected to commence upon receiving other required regulatory approvals towards the end of the financial year.
Our resilient financial discipline supports the Group’s growth strategy by driving efficiency and productivity through various lean initiative measures, controlling discretionary spending, driving down working capital and sustaining return on capital employed. The Group maintains its aspiration of delivering sustainable and profitable volume-led growth and impactful innovation over the medium term. We are also ramping up digital capabilities and new channels.
The second quarter presented a new set of challenges to our teams. However, they remained determined and worked together to ensure we fulfilled our growth strategy. I applaud my teams for this commitment, and thank them for being innovative, agile, and responding to shifts in consumer behaviour while ensuring the needs of the nation are met.
Kasturi C. Wilson
Group Chief Executive Officer
November 10, 2021