Hemas : Interim Report as at 30th June 2022

Hemas Holdings PLC | Interim Report 2022/23 - Q1

Financial Year 2022/23 - First Three Months Performance

Chief Executive Officer's Review

Hemas Holdings PLC (HHL) continued to be resilient amidst challenging macroeconomic conditions to post a Group revenue of Rs. 24.8 billion, an increase of 51.4 per cent over same period last year. A quarter-on-quarter comparison is provided where necessary to deliver a holistic view of the Group performance, as COVID-19 related disruptions resulted in lower performance during the first quarter of last financial year. Whilst the COVID-19 pandemic had minimum impact on the quarter under review, continued economic pressure hindered the Group performance, with Sri Lanka facing its worst economic crisis since independence. Lack of foreign exchange liquidity resulted in challenges to access essentials such as fuel, food, and medicine. The country also defaulted its external debt obligations, resulting in the downgrading of the country's long term credit rating to a 'Restricted Default'. Steep currency depreciation, volatile global commodity prices and supply chain disruptions further challenged the businesses resulting in a significant increase in headline inflation. Consequently, an increase in civil unrest and political instability was witnessed in comparison to the previous quarter.

Despite the macroeconomic challenges, continued strategic focus on our defensive core sectors resulted in a growth in revenue of 17.7 per cent for the Group against last quarter. Consumer and Healthcare Sectors contributed to improved earnings of Rs 1.1 billion, a growth of 69.5 per cent against last year and 1.6 per cent against last quarter. Groupwide synergies and customer centric new product launches and line extensions coupled with effective savings through collaboration with all stakeholders, improved lean initiatives and digital transformation projects drove the performance for the quarter. Operating profit for the quarter stood at Rs. 2.0 billion compared to Rs. 1.1 billion recorded last year and Rs. 1.5 billion reported last quarter.

Consumer Brands

LKR 000	Financial Snapshot
			Growth	Growth
		FY23 Q1	Vs FY22	Vs FY22
			Q1	Q4
Consumer Brands		8,712,721	62.7%	5.5%
Healthcare		15,675,379	49.9%	26.1%
Mobility		443,910	-24.3%	8.3%
Other		9,237	122.1%	-6.8%
Revenue		24,841,247	51.4%	17.7%
Gross Profit		6,339,351	36.1%	10.7%
Gross Profit Margin		25.5%	-2.9pt	-1.6pt
Operating Profit		2,030,969	86.1%	32.9%
Operating Profit Margin	8.2%	1.5pt	1.0pt
Earnings		1,080,150	69.5%	1.6%

In June 2022 both the Colombo Consumer Price Index (CCPI) and the National Consumer Price Index (NCPI) increased for the nineth consecutive month, a growth of 54.6 per cent and 58.9 per cent respectively on a year- on-year basis. Soaring inflation led to a shift in consumer behaviour, and customer purchase decisions were weighted towards affordability instead of brand loyalty. Industry also witnessed value growth while the corresponding volume recorded a degrowth across all verticals. Both basket values and footfall to stores recorded higher values with increased prices and customers opting for multiple visits for the same basket of items.

An increase in trader and consumer stock up for the back-to-school season coupled with lower availability of imported products improved the market demand for locally manufactured stationery items. Subsequent school closures towards the latter part of the quarter had minimal effect on demand. Teacher engagement on online platforms reduced with less concentration on grades that are not exam focused, adversely impacting the e- learning momentum amongst school children. Further, the challenges of rising paper prices accompanied by difficulties in accessing foreign exchange for imports with paper been considered a non-essential item continued to the quarter under review.

The operating environment of Bangladesh experienced challenges with the rising inflation since mid-last year coupled with a quarterly trade deficit. Both food and non-food inflation rose over 7 per cent, adversely impacting

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the disposable income levels. With the country's slow phased vaccination drive, a rise in COVID-19 cases and related deaths were witnessed towards the latter part of the quarter. On the back of a visible slowdown in worker remittances and increased import payments, Taka faced marginal depreciation pressure. However, Bangladesh remains a highly attractive investment hub with double digit growth in export earnings and above average growth expectations.

Consumer Brands Sector recorded a revenue of Rs. 8.7 billion, an increase of 62.7 per cent over last year driven by improved performance of all business units. Our purpose-led core portfolio and extensive value adding new product launches collectively resulted in increased market share across multiple categories. Expansions made in overseas footprint in both Home and Personal Care and Learning Segment resulted in a 74.2 per cent growth in year-on-year export and international revenue. Consequently, the sector reported an operating profit of Rs.

704.3 million and earnings of Rs 499.0 million, a growth of over 100 per cent over last year stemming from the revenue growth and efficiency improvements. However, the Sector witnessed a 15.2 per cent degrowth in operating profit against last quarter with the slowdown in seasonal revenue of the learning segment and overall input cost pressure on margins.

Home and Personal Care

Both the modern and general trade channels witnessed a double-digit growth across personal care, personal wash, and laundry verticals. During the quarter, multiple products were launched improving Hemas' innovative and strategic position in the market. Understanding the shift in consumer behaviour, pack size choices were introduced for many key brands including 'Diva' and 'Baby Cheramy' providing the customers an affordable alternative amidst the increasing inflationary pressure. All launches and relaunches of key brands gained traction despite the adverse market conditions resulting in over 10 per cent contribution to the revenue.

Foreign exchange liquidity pressure continued to adversely impact the supply chain. Global commodity prices affected the margins leading to a margin erosion despite implementing cost saving initiatives and efficiency improvement projects to negate the adverse impact. Cautious price adjustments were also made during the quarter in line with the market.

Learning

Improved performance of the last quarter was partially continued to the current quarter with the back-to-school season being shifted to April. The business' key brand 'Atlas' gained market share across all sectors with double digit volume led growth across both general and modern trade channels. Recent new products introduced to the market under the brands 'Atlas' and 'Innovate' gained significant momentum in the market.

Consumer Brands International

During the quarter the Bangladesh business maintained its market position with a stable volume growth. Contribution from new products increased to 18.9 percent during the quarter as against 7.1 per cent recorded last year with gained traction on the personal wash brand 'Acticef' and improved performance of 'Eva by Kumarika', an entry point value added hair oil launched last year.

Healthcare

The state Healthcare sector was adversely affected with shortage in medicine supply, amidst constraints on government spending on healthcare due to lower forex liquidity. The country relied heavily on donations and credit lines for essentials for supplies, whilst prioritising requirements for urgent critical surgeries. Despite the lower spread of COVID-19, a surge in cases was witnessed in early July 2022. In addition, the World Health Organisation (WHO) has declared a global health emergency over monkeypox due to the rapid spread of the disease. This could have significant shocks to the healthcare system of Sri Lanka if transmitted given the vulnerable status of the economy.

Hemas Healthcare sector recorded a revenue of Rs. 15.7 billion, a growth of 49.9 per cent over last year. Both, Hospitals and Pharmaceuticals Businesses collectively contributed to the strong performance of the sector. Operating profit and earnings of Rs. 1.2 billion and Rs. 713.1 million for the year was an increase of 38.1 per cent

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and 14.8 per cent respectively. On a quarter-on-quarter basis the Sector reported an operating profit growth of 30.2 per cent and an earnings growth of 11.8 per cent.

Pharmaceuticals

The Pharmaceutical business of the Group delivered a steady performance during the quarter leading to a double-digityear-on-year revenue growth of 57.5 per cent. Price increases introduced in March 2022 were followed by further adjustments in April 2022 due to the industry facing immense pressure amidst steep rupee depreciation.

In line with our vision to increase access to affordable quality healthcare, Hemas liaised with principals, financial institutions, supply chain partners and authorities to ensure uninterrupted supply of critical medication into the market. Accordingly, multiple lifesaving medicines and medical surgical devices were also introduced to the portfolio. During the quarter, Hemas Pharmaceuticals was recognised by Bureau Veritas as a Good Distribution Practices (GDP) organisation, marking yet another milestone.

During the quarter, Group's pharmaceutical manufacturing business, Morison commenced commercial production at its EU-GMP compliant facility. As a part of its strategy to minimise the dependency on government buy back scheme, Morison welcomed its latest addition to the branded generics portfolio Ros-10, Rosuvastatin 10 mg tablet targeted for cardiovascular diseases at a significantly lower price point. Empamor, the first locally manufactured Sodium-GlucoseCo-Transporter-2 (SGLT2) inhibitor in Sri Lanka, introduced last year continued to gain traction leading to a collective revenue contribution from new product launches of 4.0 per cent.

Hospitals

Increased footfall and occupancy witnessed during last quarter continued with hospitals recording an underlying revenue of Rs 1.5 billion, a growth of 37.8 per cent over same period last year. Increase in surgical patients coupled with continued focus on digital and lean initiatives positively impacted the margins.

Mobility

During the quarter total throughput volumes and transhipment volumes of the Port of Colombo experienced a decline of 6.6 percent and 4.6 per cent respectively. The increases in global freight rates and devaluation of the rupee positively impacted the Maritime industry despite the marginal degrowth in volume. The Aviation industry continued to witness challenges with both the cargo and passenger volumes reporting a degrowth under escalating air rates. Shortage of refuelling capacity in Colombo has resulted in multiple airlines reducing operating capacity to/from Colombo.

The Mobility Sector reported an underlying revenue of Rs. 443.9 million, a growth of 53.1 per cent over last year mainly due to increased yields. Similarly, operating profits and earnings witnessed a growth of 65.9 per cent and

70.3 respectively. Despite the 8.3 per cent growth in revenue, earnings reported a degrowth of 27.7 per cent against last quarter due to increased volatility in the business environment.

Our Commitment to ESG

During the quarter, the Group's carbon footprint per million rupees of revenue decreased by 11 per cent to 3,761 MT while the water withdrawal per million rupees of revenue decreased by 10 per cent to 4,3178 cubic meters. The Group continued investing in its teams and as a result training hours increased by 120 per cent to 2.4 hours per employee.

As Sri Lanka navigates its worst economic crisis, Hemas continued to focus on supporting our communities by creating a social security safety net and providing emergency relief to adversely affected families.

Being the leader in Pharmaceuticals, the Group partnered with UNDP to ensure vulnerable communities had access to essential and near essential medicine. In addition, the Group partnered with a few like-minded corporates and launched 'Manudam Mehewera' an initiative committed to provide dry ration packs to 100,000

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adversely affected families who are facing hardship as a result of the economic crisis. As a part of our social commitment to champion inclusivity and eliminate inequality, Hemas Outreach Foundation partnered with 'Hoppers' a well-known chain of restaurants in UK to provide nutrition packs to children of our Piyawara pre- schools from the most affected areas.

Outlook

Hemas unlocked group synergies and remained agile and resilient to deliver exceptional results amidst a challenging environment. The operating environment will continue to be challenging in the next few months and from a national perspective, arriving at a staff level agreement with the International Monetary Fund (IMF) will be a key priority. With a clear strategic focus in place and resilient core sectors, Hemas, is equipped to battle the upcoming challenges. Prudent and pre-emptive liquidity management measures are in place to further strengthen the cash position of the Group.

Although a contraction is being witnessed across all consumer segments, in the short to medium term our focus will be to drive market share improvements by continuing to cater to the ever-evolving needs of consumers. The Group will also continue to invest in research and development capabilities in both Consumer and Healthcare spaces to fulfil the changing needs of the nation. Internationalisation and expanding our regional footprint will also be a key focus area for both Home and Personal care and Learning segments while digitisation, efficiency improvement and prudent cost management will be integral pillars of strengths across the Group in the coming months.

I am extremely proud of our collaborative nature that brings all internal and external stakeholders together as one team to create meaningful relationships and synergies to strengthen the Group's drive in helping rebuild the economy in the months to come.

Kasturi C. Wilson

Group Chief Executive Officer

August 9, 2022

Colombo

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