CEO’s Review – Strong Performance by Atlas Underpins Hemas Profit Growth

Hemas Holdings PLC continued its recovery from a challenging first six months with Q3 FY 19/20 Group revenue and operating profit broadly in line with Q3 FY18/19. On a Quarter on Quarter (Q-o-Q) basis, we grew strongly over Q2 FY19/20. Revenue grew by Rs.2.3Bn, 14.9% over Q2 while operating profit and earnings rose by Rs.1.2Bn and Rs.767.5Mn. This growth was driven by our Consumer and Healthcare businesses with strong performance by Atlas during the important back to school season. On a year-to-date basis, the Group’s performance has been impacted by the aftermath of the Easter Sunday attacks during Q1 and Q2, recording a consolidated revenue of Rs.47.0Bn for the 9 months ended December 31, 2019, 2.1% lower than last year. Operating profits for the first nine months of the financial year were Rs.2.6Bn, a Year-on-Year (YoY) decline of 39.9%. Group earnings stood at Rs.755.9Mn for the nine months. Q3 indicated a significant recovery in profitability to Rs.974.7Mn from the cumulative loss of Rs.218.8Mn during Q1 and Q2. The Group delivered an underlying revenue of Rs.46.6Bn and earnings of Rs.1.1Bn, 1.8% growth and 57.0% decline over last year, excluding the negative impact of Rs.230Mn from N*able, our technology business sold in Q2 FY20 and Hemas Southern Hospitals which we exited in Q3 FY19.   Consumer During the quarter, both our Consumer businesses witnessed a steady recovery following subdued performance in the first half amid a general economic slowdown and the adverse impact from the aftermath of the Easter Sunday attacks. Atlas  delivered robust back to school seasonal results, surpassing last year’s revenues and profitability. Our monthly Consumer revenues returned to prior year levels by the end of Q2 and we reported a Q-o-Q  growth in revenue and operating profits of Rs.1.7Bn and Rs.538.3Mn respectively for the three months period in consideration. Despite this challenging environment, Q3 has been an active quarter with a number of launches and relaunches in our Home & Personal Care range in Sri Lanka. Subsequent to the recent reduction in VAT rates by the Government, price reductions have been taken across our consumer portfolio ensuring this benefit is passed on to our consumers. Due to the sharp slowdown in the first quarter, year-to-date consumer sector revenue stood at Rs.19.7Bn for the nine months ending December 31, 2019, indicating a YoY decline of 2.8%. Sector profits of Rs.1.8Bn witnessed a drop of 35.7% over last year due to higher spends in marketing and sales and distribution, to strengthen the Hemas brands. Our Home and Personal care international business remained depressed during the quarter as a result of  heavy competition in the value-added hair oil segment in Bangladesh coupled with increased duty and tariff under the new budget.   Healthcare Consolidated healthcare sector revenue for the first nine months of the year stood at Rs.22.5Bn, a YoY increase of 9.8% whilst operating profit and earnings increased by 6.1% and 1.3%, due to steady recovery at Morison and Hemas Hospitals compared to the first half. Our pharmaceutical distribution registered satisfactory performance with the price increase on price-controlled pharmaceuticals becoming effective in May. Further, we have seen increased volume growth in our distribution segment. Both Thalawathugoda and Wattala hospitals recorded a strong recovery in revenues and profitability aided by improved operating metrics with average occupancy of 70% during the quarter. Hemas Hospitals improved Q3 operating profitability over Q2 by approximately Rs.100.0Mn with EBITDA margins nearing prior year levels. Morison PLC, our pharmaceutical manufacturing arm achieved a revenue of Rs.2.7Bn and operating profit of Rs.187.0Mn for the nine months ended December 31, 2019. Revenue growth was 7.2% with profitability flat against last year. During the period we e signed a new 5year buyback agreement with the Ministry of Health continuing to build on our growing reputation as a high quality, cost effective pharmaceutical supplier to the nation. The construction of our new plant is progressing well and we are now installing machinery and equipment. We continue to invest behind new initiatives within the healthcare space, with our pharmaceutical distribution in Myanmar and digital healthcare businesses incurring start-up losses of approximately Rs.50.0Mn for the quarter. Net finance cost increased due to working capital financing at pharmaceutical distribution and the expenditure on the new Morison manufacturing plant.   Leisure, Travel and Aviation Hemas Leisure, Travel and Aviation business performance declined sharply with revenues and earnings down Rs.584.8Mn and Rs.112.5Mn compared to last year. A series of stringent cost control initiatives partially offset this fall in profitability. Although tourist arrivals in Q3 indicate a 11% shortfall over last year,  arrivals to Sri Lanka for the quarter ended December 2019 picked up by 46%  compared to the quarter ended September 2019. Serendib Group of Hotels recorded a revenue of Rs.995.3Mn, a 51.2% decline over last year with an average occupancy of 73% across its hotels during the quarter, 13% below the occupancy achieved in the same quarter last year. Rates across all properties reduced during the period under review, in order to boost occupancy, which led to a drop in profitability during the peak season. Against this backdrop, our Travel and Aviation interests also recorded a revenue decline of 13.2%, and an operating loss of Rs.12.8Mn during the nine months ending December 31, 2019. This is primarily driven by cancellation of tour groups in our inbound segment.   Mobility Hemas Logistics and Maritime recorded a revenue decrease of 15.6% over last year, with revenues of Rs.1.8Bn. New business volumes in our new Spectra distribution center have built up more slowly than planned. By December 31, 2019, the distribution centre was operating at 70% capacity. In maritime, due to weakened local economic conditions and global slowdown, year-to-date throughput has declined.   Conclusion The Group has seen an on-going recovery in a period of weak economic growth. This performance demonstrates the resilience of our business model and the dedication of our team. We continue to work hard to sustain our growth in the final quarter. We anticipate an improvement in consumer sentiment and economic activity due to the fiscal stimulus measures, announced by the new Government, feeding through into the economy.  

Steven Enderby, Group Chief Executive Officer

 

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