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CEO’s Review Q4 2018/2019

The horrific events of Easter Sunday and the on-going challenging security situation in the country remains a major concern for all of us. We are trying to help those directly impacted and are also taking steps to ensure the safety of our staff and business.  We applaud the hard work of the security forces in their efforts to ensure the safety and security of all.

In the aftermath, Hemas has been subject to baseless allegations that we favour one community over another. The Hemas that I am proud to play a leadership role in is a secular, performance, ethics and value driven organisation. We take decisions based on delighting our customers, improving performance and developing our great teams, while always looking to reduce our impact on the environment and improve the well-being of the community. We are committed to serving all Sri Lankans well.

The Group reported consolidated revenue of Rs.64.1Bn for the year ended March 31, 2019, indicating a Year-on-Year (YoY) growth of 28.5%. Group operating profit stood at Rs.5.7Bn, a growth of 33.4% over the previous financial year. The profit attributable to equity holders of the parent at Rs.3.4Bn is a YoY growth of 25.4%.

The acquisition of Atlas and additional one offs relating to the disposal gain from the sale of Hemas Southern hospital, fair value adjustments and unrealised exchange losses impacted operating profit for the year. If we remove these we achieved full year revenue growth of 13.3% and operating profit growth of 9.2%, the result of weak macroeconomic growth of 3.2% in 2018, significant currency devaluation of 13% for the year ending 31st March 2019 and price controls on pharmaceuticals.

During the period under review, our consumer sector recorded a revenue of Rs.25.6Bn, indicating a YoY growth of 55.0%. Operating profit of Rs.2.8Bn grew by 91.1% during financial year 2018/19.  Amidst challenging economic conditions, our domestic Home and Personal Care business managed to sustain profitability, registering a robust topline performance during the year. The growth was led by a favourable mix of personal care products combined with price and volume growth. To support growth there had been continued focus on increasing operational efficiencies and we are seeing the benefits of our profit improvement programme initiated last year. Our personal care brands experienced share gains across all categories. Profitability during Q4 was challenging due to duty increases coupled with currency devaluations impacting the price of raw materials. Marketing and trade spends were higher in the quarter as we invested behind the line-up of relaunches brought to market during late Q3. In Bangladesh, the business has recorded modest year-to-date revenue growth of 6.1% during the year. Profit growth continues to be a challenge due to new promotional campaigns to combat competition. Atlas recorded revenue growth of 14.9% over the same period last year (9 months of which was prior to our ownership) performing well during the Q3 back to school season. Atlas market share increased in its core categories and has also seen growth in its new back to school segment comprising of school bags.

Healthcare sector achieved a consolidated revenue of Rs.27.7Bn, a YoY increase of 20.3% while operating profit and earnings indicated a decline of 5.0% and 10.5% respectively. We have started to see this improve in Q4, when the rupee appreciated by 4% against the US Dollar, delivering 9.4% operating profit growth compared to Q4 FY18.

Hemas pharmaceutical distribution registered strong revenue growth stemming from the latest addition of new principals last year and the continued efforts to improve the existing portfolio. However, the impact of price regulation and significant currency depreciation continues to compress margins. Additionally, the increase in interest costs from working capital funding added to pressure on earnings.

Hospitals experienced good growth in revenue in relation to its industry achieving an average occupancy of 60% across the two hospitals, Wattala and Thalawathugoda. The increase in the number of channeling, surgical and inpatient volumes during the year contributed towards improved operational performance in addition to the lean projects carried out at hospitals. Hospital group reduced its gearing due to the cash proceeds received through divesting Hemas Southern Hospital.

Our pharmaceutical manufacturing business, Morison posted a revenue of Rs.3.6Bn and operating profit of Rs.260.5Mn during FY 2018/19. Morison’s underlying revenue growth, excluding Alcon distribution business, which we exited during the latter part of FY2017/18, was 8.7%. Profitability was impacted due to pharmaceutical price controls and the significant rupee depreciation on raw material imports. Morison experienced profitability challenges owing to increased advertising and promotional expenditure in retaining the competitiveness in the OTC consumer brands range. Underlying earnings at Morison PLC recorded a decline of 44.0% excluding the loss of Alcon agency, contributing negatively towards the segment earnings.

Hemas Leisure, Travel and Aviation (LTA) sector achieved revenues of Rs.5.0Bn, reflecting a growth of 19.4% during FY 2018/19. Serendib Hotels (SHOT) recorded a strong quarter, with an average occupancy reaching 91% across its owned hotels. Despite a robust revenue contribution to the quarter, profitability at the SHOT is a challenge with increased finance costs over last year, due to the acquisition financing for the Lantern boutique hotel and exchange losses. During Q4, Anantara Peace Haven Tangalle improved performance with occupancy crossing over 75% although the exchange losses arising from the foreign currency loan was a drag on group profitability. Inbound travel segment experienced a resurgence in operating performance through the restructuring process carried out to secure key accounts and better negotiations on improved supplier margins. Overall sector underlying operating profits increased by 68.4% due to remarkable performance across the LTA sector during the peak season, Q4, contributing 33.6% to the Group operating profit.

Hemas Logistics and Maritime sector recorded a moderate revenue growth of 0.7% over last year with revenues of Rs.2.8Bn. The main contributors to the growth were increases in volume in the maritime sector coupled with the devaluation of the rupee. Although the logistics business experienced a modest growth in 3PL and warehousing segments during the year, profitability is impacted owing to delays in ramp up of the new logistics park distribution center and the sudden drop in demand in import cargo due to devaluation.  The commencement of loan repayments and depreciation charges as commercial operations commenced further added to the margin pressure.

Our technology business, N*able reported significant growth in the fourth quarter with increased operating profit over last year by 16.6% whilst operating profit growth remained flat during the year.

We continue to work hard to mitigate the impact of the terrible events of Easter Sunday on the business. The immediate direct effect has been on the tourism sector. Our teams are reviewing every cost to see how we can reduce losses from the decline in tourist arrivals.  During 2018/19 our Leisure and Travel interests generated 3.0% of Group Earnings. We are also concerned about the impact of the terrorist events and communal unrest on domestic consumer demand.

Steven Enderby

Chief Executive Officer

24 May, 2019

Colombo