Hemas Delivers Resilient Performance Amidst COVID-19 Pandemic

CEO’s Review – Hemas Holdings PLC Hemas Holdings PLC reported a consolidated Group revenue of Rs. 13.0 billion, a decline of 1.6% during the first quarter of the financial year 2020/21, compared with the same period last year. Group EBIT at Rs. 415 million for the period is Rs. 395 million higher than the previous financial year. Earnings of Rs. 269 million for the quarter were an improvement of Rs. 695 million. In understanding our financial performance, relative to last year, it is important to note that Q1 FY 2019/20 was negatively impacted by the aftermath of the 21st April terrorist attacks, with the COVID-19 pandemic impacting Q1 FY2020/21. Of importance is month on month performance during Q1 FY20/21, as a measure of the impact of COVID-19 on the Group. Our performance was significantly negative in April; however, our core Consumer and Healthcare businesses have shown continued recovery in May and June. In the month of June, our performance in these sectors, which account for more than 90% of our revenues, was broadly in line with our original plans. Other sectors, particularly Leisure where we recorded an operating loss of Rs. 277 million, have not shown the same resilience. Overall Hemas is ahead of our initial COVID impacted expectations due to a relentless determination to keep our core Consumer and Healthcare business operating and providing our essential products and services to our customers across the country. The businesses that account for the majority of our revenues and profitability have recovered strongly. We have maintained tight control on costs and cashflows and as a result, have significantly improved our cashflow from operations during the quarter. The health and safety of our team remains a primary consideration, and we are investing in expertise and protective equipment to minimize risks. Our teams have done an excellent job in managing the impact of the slowdown in economic activity and supply chain disruptions while addressing the operating challenges to factories, hospitals, hotels and sales and distribution operations. We have made strong progress through the quarter. However, significant and unpredictable COVID-19 related business risks remain.   Consumer Our Consumer sector reported a revenue of Rs. 3.8 billion during the quarter over Rs. 4.6 billion in the corresponding year, a decline of 16.6%. Similarly, the sector operating loss of Rs. 48 million is a                   Rs. 64 million decline over last year’s profit of Rs. 16 million. This weaker performance in the Consumer sector is mainly attributable to Home and Personal Care (HPC) International and Atlas, while our domestic HPC business grew. COVID-19 had a negative impact on Atlas with schools closed throughout the quarter. A phased re-opening plan commenced in the first week of July. HPC International experienced contraction in the first two months of the pandemic due to hair oil not being an essential category. As a result, a volume decline was experienced across both Bangladesh and West Bengal. Our newly launched health focused personal wash brand Shield, soap and hand sanitizer, has been well received in the HPC Domestic market. The products’ strong anti-bacterial and germ-killing capability resonates with consumers focussed on soap and sanitizer as a first line of defense during the pandemic. During the quarter, we have seen significant performance variance across categories, with personal wash, home care and oral care all performing strongly. HPC Domestic has increased production and sales during the quarter and we are now at near-normal levels.   Healthcare Hemas Healthcare sector has been at the forefront of meeting the multiple challenges of the COVID-19 pandemic. Our Pharmaceutical Distribution business operated at normal levels, despite significant logistical challenges, as we responded to the Governments call to ensure essential pharmaceutical products were available across the country. Our e-Commerce venture in online prescription fulfilment, Healthnet, experienced a significant spike in demand during the quarter. Overall our healthcare businesses recorded revenues of Rs. 8.6 billion, with operating profits of                     Rs. 647 million. Growth within the sector was driven by the recently added distribution agency in the nutrition space. No major supply shortages were experienced. Morison was impacted by the lockdown, with the factory being unable to run at its optimum capacity levels during the first few weeks of the pandemic. However, production increased during the quarter as we prioritized meeting the Government’s pharmaceutical supply requirements. Overall revenues and operating profits improved by 27.8% and 12.0% compared to the same period last year. The new manufacturing facility at Homagama has been delayed due to the lockdown. Construction and installation work has re-commenced and we anticipate commercial production starting in April 2021. At both Pharmaceutical Distribution and Morisons we have made progress in improving working capital by reducing debtor levels. As ever our Hospitals teams have ensured that high quality health services have been available 24*7 throughout the pandemic. Both Thalawathugoda and Wattala hospitals experienced a decline in patient footfall and elective surgeries reduced during lockdown, resulting in lower inpatient and outpatient revenue.  Again we have seen month on month recovery. During the quarter we incurred additional costs of Rs. 50 million to ensure required supplies of personal protective equipment were available.   Leisure With the divestment of the Group’s interest in Travel and Aviation segments, Leisure comprises our hotel investments of Serendib Hotels PLC and Anantara Peace Haven Tangalle. The Group’s Leisure business was significantly impacted during the quarter with the suspension of operation of our hotels due to lockdown and the closure of the airports. While airports are yet to re-open, our hotels re-commenced operations in July. Two of our properties are operating as paid quarantine facilities, while others are serving the domestic tourism market. Leisure reported revenues of Rs. 42 million.  Following stringent cost containment measures taken by the management, the sector reported an operating loss of Rs. 277 million.   Mobility Hemas Mobility sector revenues decreased by 34.4% compared to Q1 last year, with revenues of             Rs. 456 million. Operating profit declined by 65% over last year. The decline in performance is attributable to weakened trade and transhipment volumes impacting shipping agency volumes and the closure of the airport limiting airline aviation activity to cargo operations only. During the quarter, Hemas restructured its shareholding in one of the shipping agencies and recorded a disposal loss of Rs. 89 million. Our Logistics arm reported a profitability improvement of Rs. 11 million.   Future Outlook The Group has delivered resilient performance in the quarter, despite the profound impact of the ongoing COVID-19 crisis. Overall, our Healthcare and Consumer businesses have shown strong month on month recovery and by June were achieving pre-COVID activity levels. Leisure remains a challenge. We recognize the on-going risks that the pandemic represents to the Group, whether through a second wave, a contracting economy or supply chain or other constraints. We are adopting a dual strategy recognising that increased consumer consciousness towards health and hygiene is an opportunity for Hemas and also aggressively focusing on cost management and cash conservation in order to navigate through these unpredictable times. This will be my final quarterly review as Group CEO, as I retire on 30th September and Kasturi takes on the role of leading one of Sri Lanka’s best companies. I would like to take this opportunity to thank all of the many Hemas stakeholders I have interacted with over the years for their help, guidance, challenge and humour. I have been privileged to work with exceptional teams in unprecedented times. Together we have come through many unpredicted challenges to deliver remarkable outcomes. I wish Kasturi and Hemas every success in the future and am confident that this great company will go from strength to strength.     Steven Enderby Group Chief Executive Officer August 13, 2020 Colombo

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