Hemas sees ongoing recovery after difficult first quarter

Hemas Holdings PLC said on Friday it sees ongoing recovery, after a difficult first quarter largely arising from external factors. 

“Q1 FY2019/20 has been a challenging period for Hemas, with revenues 2.3% below last year. This has been primarily a result of the terrorist attacks of 21st April, with the aftermath causing economic slowdown and difficult trading conditions. Our profitability has been more significantly impacted as we recorded a loss before tax of Rs. 140 million,” Hemas Holdings CEO Steven Enderby said. 

According to him, the key factors in this have been in the business mix with Hemas higher margin Consumer businesses experiencing a slowdown while the lower margin healthcare businesses grew revenue by 7.6%. 

In line with the sharp downturn in the tourism industry, Hemas’ Leisure and Travel interests incurred a loss at earnings level of Rs. 129 million. Enderby said the generally depressed economic environment has resulted in weak performance across the group, in particular at Morisons and N*able. 

“We were also impacted by a number of one-offs totalling Rs. 130 million, including a charge from the adoption of SLFRS16. We incurred a dividend tax charge of Rs. 278 million following the upstreaming of dividends to pay our final dividend and redeem our listed debenture,” Enderby added.

Following is Enderby’s commentary on the sectoral performance in the first quarter. 

Consumer 

During the quarter, both our Consumer businesses have been impacted by market-wide weak consumer sentiment and baseless ethnically divisive attacks on our business and brands. Many of these attacks appear designed to mislead the public and exacerbate already strained communal relationships. We continue our efforts to ensure everyone understands that building great Sri Lankan consumer and healthcare brands and services is an important component of the national economy generating employment and taxes, developing great suppliers and sales and distribution teams across the country, and ultimately driving the livelihoods of thousands of families. As our teams across the Group work to ensure this message is understood, we are seeing a steady recovery in the performance of our consumer businesses from the lows of May. There is ongoing improvement into Q2 as we push hard to return to normal business levels as quickly as possible. 

We are optimistic that Sri Lanka is on its path to recovery, displaying its customary resilience...Success for us, and for the country, is founded on unity. We are working together to continue the recovery we have seen over the last two months, as we target a return to normal levels of business activity - Hemas Holdings CEO Steven Enderby

Our consumer sector revenue stood at Rs. 4.6 billion for the three months ending 30 June 2019, a YoY decline of 14.3%. Latest market data indicates an overall contraction of the Personal Care market by 4% in Q1. Morison OTC segment recorded a drop in revenue by 28.4% amounting to Rs. 177.2 million, although OTC products such as Lacto are now gaining traction. Atlas performance was subdued due to the factors referred to above and during the month of May schools were closed as a result of the prolonged emergency situation in the country. 

Home and Personal Care international revenues increased by 7.4% following the re-launch of Kumarika in May, contributing positively towards the segment results. However, profitability still remains a challenge due to heavy marketing spend post-launch.

Healthcare

Consolidated healthcare sector revenue for the first three months under review stood at Rs. 6.9 billion, a YoY increase of 7.6%, whilst operating profit and earnings fell by 23.9% and 29.8%, due to depressed profits at Morison’s and Hemas Hospitals. Hemas Pharmaceutical Distribution operation registered satisfactory performance with the price increase on price-controlled pharmaceuticals becoming effective in May. Hemas Hospitals achieved an overall average occupancy of 50%, with profitability down on last year. 

Morison pharmaceutical manufacturing arm posted a revenue of Rs. 488.9 million and operating profit of Rs. 21.9 million for the three months ended 30 June 2019, a decline of 18.1% and 61.1% respectively. The YoY decline is mainly attributable to the loss of working hours in the manufacturing plant post the terrorist attacks due to its location. As we continue to invest behind new initiatives within the healthcare space, pharmaceutical distribution in Myanmar and digital healthcare business are still in the ramp-up stage, making start-up losses amounting to Rs. 41 million approximately for the quarter. The sector also recorded increased finance costs on account of higher working capital financing in our pharmaceutical distribution business and the expenditure on the new Morison manufacturing plant. 

Leisure, Travel and Aviation

Hemas Leisure, Travel and Aviation business performance declined sharply with revenues down Rs. 105.3 million compared to last year. This is mainly driven by the loss of tourist arrivals in May and June by 71% and 57% respectively. However, a series of stringent cost control initiatives offset the unfavourable impact to profitability from a significant revenue loss. Serendib Hotels reported a revenue decline of 27.8% at 42% occupancy across the Serendib Hotel group portfolio. Against this backdrop, the Travel and Aviation segment recorded a revenue decline of 2.6%, and an operating loss of Rs. 24.5 million during the quarter. This is primarily driven by cancellation of tour groups in our inbound segment. We are now seeing early signs of recovery in the sector.

Mobility

Hemas Logistics and Maritime recorded a revenue decrease of 14.6% over last year with revenues of Rs. 613.6 million. This is mainly attributable to the delays in the new Spectra distribution centre ramp-up plans. Additionally, the segment profitability is impacted by the increased depreciation and finance costs resulting from the new facility. 

N*able recorded a net loss of Rs. 163.6 million for the quarter. In line with our strategy of focusing on our core businesses, in early Q2, we concluded the sale of our stake in N*able, our technology services business. The loss from the sale of approximately Rs. 114 million will impact our Q2 financials.

During these challenging times, we remain committed to our role in serving the community. Assisting communities directly affected by the Easter Sunday attack has been a priority for us. Through our Hemas Outreach Foundation, we have reached out to families in Katuwapitiya. From May, we commenced providing professional psychological first-aid to the residents and these services will continue as long as they are needed by the community. Our flagship project ‘Piyawara’, focusing on early childhood development in Sri Lanka, opened its 53rd pre-school in Bandarawela during this quarter.  We have three more pre-schools in the pipeline. The completion and the successful launch of AYATI, the first national centre for children with disabilities, remains a priority for us, as we look to assist the Government of Sri Lanka in addressing a national need.  The construction of the centre was recently completed by the Sri Lankan Army and handed over to the Faculty of Medicine, University of Kelaniya by the Commander of the Sri Lanka Army.  We aim to open AYATI to the public on 3 December 2019.

We remain shocked and saddened by the events that unfolded on Easter Sunday and strongly condemn these terrorist attacks. However, we are optimistic that Sri Lanka is on its path to recovery displaying its customary resilience. At Hemas, throughout our 70 years we have learned resilience is an essential component of any successful Sri Lankan business. I have been hugely impressed with my team’s hard work and energy over this quarter as they have visited every corner of the country ensuring everyone understands we are a great Sri Lankan business playing its part in building a better Sri Lanka. Success for us, and for the country, is founded on unity. We are working together to continue the recovery we have seen over the last two months, as we target a return to normal levels of business activity.