Hemas Rebounds Strongly in the Second Half of FY 2019/20

CEO’s Review Financial year 2019/20 has been the most challenging in the 70 year history of the Group with performance impacted by the aftermath of the Easter Sunday 2019 terrorist attacks coupled with the Covid-19 pandemic during the second half of March 2020. This has resulted in the Group recording a consolidated revenue of Rs.61.6Bn for the 12 months ended March 31, 2020, 3.8% lower than last year. Operating profits for the financial year stood at Rs.3.6Bn, a YoY decline of 37.1%. During the year, Group continued its recovery from the aftermath of the Easter Sunday crisis with post tax profits of Rs.1.7Bn for the second half of the financial year, compared with the loss of Rs.298Mn reported in the first half. This is despite the impact of Covid-19 on March 2020 performance. This improvement has been driven by our core Consumer and Healthcare businesses. When adjusted for the divestment of N*able in July 2019 and Travel and Aviation interests in March 2020, Q4 FY 2019/20 underlying revenue and operating profit grew by 2.0% and 3.5%. The Group continues to show the same resilience as we respond to the Covid-19 pandemic with our Consumer and Healthcare businesses, which account for more than 90% of revenues and profits, showing month on month recovery in Q1 20/21. The Group has taken multiple measures including, engaging high quality medical and public health advice, social distancing, provision of protective equipment and working from home to safeguard the health of our employees and ensure compliance with directives issued by the Government of Sri Lanka. The health and safety of our staff is critical while we also recognise the need for us to continue operations due to the important role we play in the healthcare of the nation.   Consumer During the first two months of Q4, our Consumer businesses performed well with strong demand across all categories. Consumer spending experienced good growth with increased consumer confidence and improved disposable incomes driven by tax cuts. However, this encouraging performance was impacted by the Covid-19 outbreak in March and the nationwide lockdown bringing sales to a virtual standstill in the last two weeks of March 2020. This resulted in sales in anticipation of the Sinhala and Tamil New Year being depressed. As a result, revenue across the consumer segment fell by 22.4% compared with Q4 last year. The drop in revenue was mainly attributable to Home and Personal Care International segment and Atlas. However, operating profit grew by Rs.157.5Mn over Q4 last year. For the full year, our Consumer businesses experienced a sharp contraction in the first two quarters following the Easter Sunday attacks and a strong recovery in Q3 and Q4 until the nationwide lockdown in March. As a result, Hemas consumer sector recorded a full year revenue of Rs.23.8Bn, a YoY decline of 6.8%, with sector profits of Rs.1.9Bn, a drop of 30.5% over last year. In January, we launched our new health oriented personal wash brand “Shield”. Shield has been well received in the market with Covid-19 driving interest in the anti-bacterial and germ killing capability of soap as a first line in defense. We have supplemented this soap range with hand sanitizer products. Similarly, Morison OTC brands experienced a successful first two months with Gripe and Lacto brands registering YoY growth. After a successful back-to-school season, Atlas performance was impacted during Q4 due to schools being closed 3 weeks ahead of its schedule for New Year holidays. Our Home and Personal Care international business remained subdued throughout the quarter as a result of heavy competition in the value-added hair oil segment in Bangladesh and Covid-19 lockdowns impacting non-essential categories. Healthcare Healthcare sector recorded Q4 revenues of Rs.8.9Bn, a YoY growth of 23.7%. Operating profit was impacted by the adoption of SLFRS16 and the VRS costs at Morisons warehouse. We have now outsourced Morisons warehousing to Spectra and anticipate that this will reduce costs going forward. Further, the island wide lockdown has resulted in slowness in collections for the last two weeks of March resulting in an increase of working capital financing. We have also seen net financing costs increase as capex has been incurred on Morisons new plant as it nears completion. As a result, sector operating profit and earnings registered a decline of 2.2% and 21.8% during the quarter. The financial year closed with the sector recording a consolidated revenue of Rs.31.4Bn, a YoY increase of 13.4%. Operating profit grew by 3.6% whilst earnings declined by 6.5%. Our pharmaceutical distribution business registered satisfactory performance due to the price increase on price-controlled pharmaceuticals in May 2019 and the onboarding of a new significant principal in the nutrition segment during the quarter. Finance cost increases of 119.1Mn during the year were due to working capital financing at pharmaceutical distribution and the cost of constructing the new Morison manufacturing plant. This resulted in compressed full year earnings margins. Morison PLC’s pharmaceutical manufacturing segment achieved revenue of Rs.2.9Bn and operating profit of Rs.260.5Mn for the year ended March 31, 2020. Revenue growth was 11.9% with profitability increasing by 9.2%. After a challenging start to the year, the business has performed strongly in the second half, seeing record levels of production. Morison was impacted by the lockdown with the factory being unable to run at its optimum capacity levels during the last two weeks of March. This brought revenues and operating profitability down by 1.2% and 5.9% during the quarter. The new manufacturing facility at Homagama is delayed. We are at an advanced stage of completion, however in line with all major construction projects, the project was on hold from the last two weeks of March, with work recommencing in mid-May. As a result, we anticipate a delay in the completion of the project. Both Thalawathugoda and Wattala hospitals recorded a strong recovery in revenues and profitability from the aftermath of the Easter Sunday attacks and completed the year with average occupancy of 68%. However, the patient footfall and elective surgeries reduced after the lockdown, resulting in lower than expected inpatient and outpatient revenue.  EBITDA margins reached prior year levels despite being impacted by two crises during the financial year.   Leisure, Travel and Aviation Hemas Leisure, Travel and Aviation business performance declined with full year revenues and earnings down by Rs.1.4Bn and Rs.479.8Mn compared to last year. Although month-on-month recovery in tourist arrivals was faster than anticipated, arrivals in the fourth quarter of FY 2019/20 declined due to global travel advisories in the wake of the COVID-19 pandemic. This led to a 32% shortfall in tourist arrivals during Q4 compared to last year. Serendib Group of Hotels recorded a revenue of Rs.1.6Bn, a 22.1% decline over last year with an average occupancy of 73% across its hotels during the quarter, 18% below the occupancy achieved in the same quarter last year. Rates across all properties were reduced in order to boost occupancy. This led to a drop in profitability during the peak season.  However, with astute measures taken by the management, the SHOT group reported Rs.28.8Mn profit from operations. As the risks from the Covid-19 outbreak intensified across the globe from January, many tour groups cancelled already booked travel plans which led to lower income generation at the inbound segment. Similarly, aviation experienced cancellation of flights. As a result, our travel and aviation segment reported a revenue drop of 31.0%. Hemas divested 80.1% of Forbes Leisure Services (Private) Limited (FLS) in March for a consideration of Rs.201Mn, reporting a disposal loss of Rs.33.5Mn. Forbes Leisure Services consisted of businesses operating in outbound and inbound travel and airline representation. This transaction excluded Emirates Airline agency which will be positioned as a core component of Hemas Mobility sector. The remaining stake of 19.9% is reclassified as a non-current financial asset.   Mobility Hemas Logistics and Maritime recorded a revenue decrease of 17.8% over last year, with revenues of Rs.2.3Bn as at March 31, 2020. New business volumes in our Spectra distribution center have built up more slowly than planned. In maritime, due to weakened local economic conditions and global slowdown, year-to-date throughput has declined. Slowdown in transshipment volumes and movement in the export sector coupled with import restrictions have resulted in depressed revenues in the maritime segment.   Future Outlook The impact of the pandemic on the Group revenues and profitability has been negative, both in the last few weeks of FY 2019/20 and continuing into FY 2020/21. Cost cutting and cash conservation measures to protect the businesses have been initiated. We have deferred capital expenditure, curtailed discretionary spending and instituted salary cuts at senior levels in the Group and in Group businesses with very low revenues. Each business is executing detailed plans to rebuild demand and supply of key products and services and to conserve cash and contain costs. While the forecasted liquidity position of the Group is satisfactory, undertaking proactive steps will enable us to maintain a stronger balance sheet and facilitate a smoother and faster recovery trajectory. More than 90% of Hemas revenues are generated from healthcare and consumer essentials and we are seeing these recover. However, it is not possible at this time to predict the full extent of the recovery. In addition, multiple new risks have emerged including increased exchange rate volatility, foreign currency availability, import restrictions and depressed economic growth.   We will continue to invest behind our core portfolios, while also adapting to shifts in consumer behavior that have been brought about by this unprecedented crisis. We believe increased consumer consciousness towards health and hygiene is an opportunity for Hemas.  We will continue to innovate with existing and new brands to meet these emerging consumer needs, while aggressively focusing on cost management and cash conservation in order to navigate through these challenging times.   Great teams can, and will, overcome crisis after crisis! Steven Enderby Group Chief Executive Officer June 17, 2020 Colombo

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