CEO’s Review Q4 – 2017/2018

Robust Revenue Growth but Operating Profit Declines as Hemas Acquires and Expands

Hemas Holdings PLC (HHL) reported full year consolidated revenue of Rs.50.9Bn, an increase of 17.2% over last year for the period ended March 31, 2018. Revenue growth was primarily driven by enhanced performance in our healthcare and mobility sectors. HHL registered an operating profit of Rs.4.2Bn during FY 18, a 11.3% y-o-y decline together with earnings of Rs.2.7Bn, 23.0% y-o-y decline.  Adjusting for our investments in growing our businesses, the Atlas acquisition and asset disposals indicate a revenue growth of 14.9% while operating profit and earnings remained flat.

Investing for Growth in Personal Care and Digital

We have made significant investments in growing our businesses which have reduced our operating profits for the year. These have included, commencing Home and Personal Care (HPC) operations in West Bengal, India, investments in digital health start-ups, and a major profit improvement project for our Home and Personal Care business. These investments have reduced operating profit by Rs.397.9Mn.

Acquisition of Atlas

We acquired Atlas Axillia, Sri Lanka’s leading school and office stationery business, in January 2018. The seasonal nature of this business with Q4 of the financial year being low season coupled with the loss of interest income from rights issue proceeds and other cash reserves used to fund the acquisition have impacted our performance. We have also had an increased tax charge resulting from higher dividend tax as we have up streamed dividends in part to finance the acquisition.

As a result, the acquisition has had a negative impact on operating profit of Rs.197.0Mn and on earnings of Rs.295.1Mn. We have now fully utilized the capital raised in the rights issue.

Core Business Performance

Adjusting for the costs associated with these investments and acquisition including one off gains from asset disposals in both the current and previous years indicate our performance in FY 18 of revenue growth of 14.9% while operating profit and earnings remained flat.  This has been partly due to broader macroeconomic factors with increased inflationary pressure and the impact on consumer purchasing power of increased VAT and prolonged drought and flooding in the earlier part of the financial year. We have also had mixed operating performance across the Group with Leisure and Travel and HPC Bangladesh underperforming, while price controls on pharmaceuticals continues to put pressure on operating margins. Conversely, our HPC Sri Lanka business has performed robustly against the backdrop of a declining Personal Care market and we have seen good growth at Hospitals and Logistics and Maritime.

Looking at the performance of our major businesses in more detail.

Consumer Brands

The consumer sector comprising of Home and Personal Care and School and Office Stationery posted a revenue of Rs.17.4Bn during FY 18, indicating a growth of 8.6% over the previous financial year, revenue growth excluding Atlas was 3.6%. Operating profits stood at Rs.1.4Bn, 31.3% YoY decline, a 22.7% decline excluding Atlas. Our HPC Sri Lanka business reported steady growth in key personal care categories with market shares being maintained across most major categories. We witnessed early signs of revival in consumer sentiment in Q4. Excluding costs associated with our profit improvement initiative, profit growth was in line with expectations in Sri Lanka but was depressed overall on account of our Bangladesh operations and the seasonality impact from Atlas.

We have made significant investments in the growth of our core consumer business this year. During FY 18, HPC, expanded its portfolio of consumer products both here and in Bangladesh by way of new launches, relaunches and improved product formulation.  As we strive to improve our operating margins in HPC, we have engaged with a major consulting firm to assist us in these efforts. The costs of this exercise have been incurred in FY18 while the benefits are starting to accrue in FY19.

Our HPC business in Bangladesh experienced a challenging year during FY18. During first half, HPC Bangladesh restructured its sales and distribution network which had an impact on sales growth and profitability compared to previous financial year. Continuous investment behind the brand has been made as the competitive intensity in the market has increased. In December, we relaunched Kumarika hair oil with an improved formulation. We have also entered the herbal beauty soap category in Bangladesh and continued our regional expansion launching Kumarika hair oil in West Bengal.

Healthcare

Our healthcare sector delivered strong financial performance registering a consolidated revenue of Rs.23.1Bn, a YoY increase of 22.6%, driven by the performance of our Pharmaceutical distribution and hospitals. However, profitability in pharmaceuticals remains challenging due to price regulation and devaluation of the rupee. During the year, we expanded our healthcare footprint with Hemas Pharmaceutical and Morison both entering Myanmar to distribute Rx and OTC products.  With a view to drive digital initiatives, including finding better ways to reach our customers through E–Commerce across our evolving healthcare businesses, we have made a number of investments in early stage technology businesses in the digital healthcare space.

Our hospitals have shown good performance with higher occupancy levels and increased focus on surgeries contributing towards a revenue growth of 16.4%. We also see improved contributions from our laboratory network of 34 diagnostic centres across the country.

Morison’s posted a revenue of Rs.3.8Bn and operating profit of Rs.598.1Mn during FY 18. As we streamline our core operations at Morison’s, underlying operating profit excluding exit from certain businesses and agencies stood at Rs.541.1Mn, a y-o-y decline of 2.0%. Morison’s Healthcare segment recorded an underlying operating profit of Rs.393.4Mn, an increase of 5.0% over last year.

 

Logistics and Maritime

 

Hemas Logistics and Maritime recorded revenue growth of 45.7% over last year with revenues of Rs.2.8Bn. During the year, Spectra, our logistics joint venture with GAC and McLarens has shown improved results, mainly driven by the 3PL operations. Spectra expanded operations with a new container yard in the Muthurajawela Industrial Zone on January 22, 2018. Construction of the new warehousing complex is on track to be completed in early FY 2019.

 

Leisure Travel and Aviation

 

Our Leisure, Travel and Aviation (LTA) business posted a total revenue of Rs.4.2Bn, reflecting a decline of 3.0% over last financial year.  Overall profitability of the LTA sector continued to be below expectations stemming from poor performance in our inbound travel arm primarily caused by a contraction of its Asian market segment and compounded by a decrease in arrivals during the summer. Serendib Hotels improved performance in Q4 by attracting higher volumes during the peak season. Anantara Peace Haven Tangalle performed comparatively better than last year, however losses incurred year-to-date have impacted Group profitability. Capitalizing on the increasing number of discerning travelers who are looking for authentic experiences in a more intimate setting, Serendib Hotels entered the villa space by acquiring a 51.15% stake in Lantern, a position it increased to a fully owned subsidiary in March 2018.

 

Overview

FY 2018 has been challenging, with robust revenue growth in tough economic conditions and depressed earnings being seen throughout the financial year. Investing for a better future is a priority and we have made significant investments and acquisitions. We continue to work hard at translating these investments into improved profitability in 18/19.

Steven Enderby

Group Chief Executive Officer

 May 25, 2018

Colombo

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