Chief Executive Officer's Review: Financial Year 2023/24 First Three Months Performance

Hemas delivered a healthy performance for the first three months of the financial year 2023/24, effectively navigating the macroeconomic headwinds as the country moves towards an economic stabilising phase. The Group posted a revenue of Rs. 29.1 billion, a 17.2 per cent growth over previous year while the operating profits witnessed a growth of 6.0 per cent to Rs. 2.2 billion. Amidst the increased finance cost, the Group's earnings growth was limited, witnessing a marginal improvement of 1.2 per cent to Rs. 1.1 billion.

Operating Environment

Sri Lanka successfully secured the initial tranche of the International Monetary Fund (IMF) extended fund facility and progress was made in both domestic and external debt restructuring efforts. Year-on-year growth in the inflation rate, which stood above 70 per cent in September 2022, witnessed a significant decline and currently rests at 10.8 per cent as of June 2023. This progress can be attributed, in part, to the improved liquidity in the foreign exchange market, which resulted in the Sri Lankan Rupee appreciating by over 14 per cent during the first quarter.

Despite the positive indicators, it is important to acknowledge that consumers continue to face challenges as their disposable income levels are impacted by the increased cost of living. Although there has been a slowdown in the year-on-year inflation and interest rates, the ratios should be carefully interpreted as the current inflation figures are based on an already inflated base. Consequently, affordability continues to be a concerning issue for the public and consumption remains contracted.

Consumer Brands

Market-wide price reductions were witnessed during the quarter, attributed to the reduction in global commodity prices and appreciation in the domestic currency. However, a noticeable slowdown in consumer demand was seen across the modern and general trade channels post festive season. The increase in taxes, higher tariffs on electricity and high borrowing costs had an ongoing influence on buying patterns, despite the price reductions.

In the stationery market, the demand for value-for-money alternatives continues to surge at a significant rate as consumers remain cautious amidst the increased pressures on disposable income. The relaxation of import restrictions, the appreciation of the rupee, and the decline in paper prices have resulted in the market experiencing an influx of brands. There has been a slowdown in secondary purchases from retailers due to the anticipation of future price reductions.

The Bangladesh economy continues to face challenges as its local currency, foreign reserves, and economic growth encounter notable risks stemming from inflation and the persisting global economic slowdown. With over 9 per cent growth in year-on-year inflation, consumers have curtailed their consumption of non-essential items and are opting for more cost-effective generic brand offerings and smaller pack sizes.

The Consumer Brands Sector reported a revenue of Rs. 11.1 billion for the quarter, a growth of 26.9 per cent over last year driven by relatively high market prices. In line with revenue growth, operating profit and earnings for the quarter improved by 62.8 per cent and 84.2 per cent to reach Rs. 1.1 billion and Rs.919.2 million respectively. Continuous efforts on improving supply chain efficiency and internal processes coupled with improved performance of the export portfolio positively contributed to the growth in profitability of the Sector.

Home and Personal Care

With the slowdown in the global commodity prices and appreciation of the domestic currency, price revisions were made across the portfolio to a greater extent. However, the benefit was partially negated by the escalation of domestic overhead costs under inflationary environment. With the increasing pressure on consumer spending, recent launches of value-for-money products continued to perform well while the newest additions to the Hemas Consumer Brands Portfolio, ‘Prasara’ and ‘Vivya’ have been gaining traction amidst multiple product extensions made to the range.

Learning Segment

The Learning Segment witnessed a reduction in demand in comparison to the previous quarters attributed to the slowdown in back-to-school season and market anticipations of future price reductions. Premium market segment witnessed over 10 percentage points growth in market share owing to the success of the brand ‘Innovate”. For the fourth consecutive year, Atlas was honoured as the 'School Supply Brand of the Year 2023' at the esteemed SLIM-Kantar People's Choice Awards, a testament to the brand's enduring strength and reach.

During the quarter, the Group acquired the remaining 24.9 per cent stake in Atlas Axillia Company (Pvt) Ltd for a total consideration of Rs 3.4 billion, making it a fully owned subsidiary of the Hemas Group. The increase in stake was in line with the commitments made to the prior shareholders and aligns seamlessly with our investment mandate, which focuses on investing in consumer and healthcare companies that bring value accretive opportunities to the Group.

Consumer Brands International

In line with the Group's strategic objective of promoting internationalisation and exports, Consumer Brands International Sector made significant steps during the quarter.

Despite the market contraction, the Bangladesh business witnessed volume growth, primarily driven by the increased traction for the personal care brand "Actisef," which was launched to reduce high single category concentration. Revenue growth in the face of mounting economic pressure was supported by consumer promotions and recent launches featuring reduced pack sizes, while the total revenue of the segment received a substantial boost of over 16 percent from the contributions of new product launches.

While the Home and Personal Care Sri Lanka business successfully extended its operations to new geographies in East Africa, The Learning Segment demonstrated substantial advancement in the export arena through the initiation of manufacturing for globally recognised brands and the launch of its newest brand ‘ignite’ in the Gulf region.

Healthcare

Sri Lanka's free healthcare system, which stood as a benchmark in South Asia, continues to grapple with challenges, including shortages of essential drugs and the migration of doctors, exacerbating the critical situation. Contraction witnessed in the demand for pharmaceuticals under deteriorating income levels, continued to be present where the private market witnessed a double-digit contraction resulting from volume decline in both essential and non-essential categories. With the recent appreciation of the domestic currency, the National Medicines Regulatory Authority (NMRA) granted approval for a 16 per cent reduction in the maximum retail price of NMRA registered medicine. Nevertheless, the industry remains concerned about the ad-hoc nature of price changes and acknowledges the urgent need for a transparent pricing mechanism that effectively reflects the real movement of relevant market drivers, ensuring equity for all stakeholders.

The Healthcare Sector posted a revenue of Rs. 17.6 billion for the quarter, a growth of 12.5 per cent over last year mainly due to the improved performance of the Pharmaceutical Business. However, the Sector failed to convert the growth momentum in revenue into profits, primarily due to increased finance costs and taxes. The operating profit for the quarter declined marginally to Rs. 1.1 billion while the earnings declined by 33.3 per cent to Rs. 475.3 million.

Pharmaceuticals

During the year the Pharmaceutical Distribution Business introduced over 30 products into the market in many key categories including urology, anti-infective and respiratory spaces providing the customers with wider variety of choices in chronic therapeutic segments. Despite the double-digit contraction witnessed in the market, Pharmaceutical Business volume contraction remained a low single digit range as Hemas continued to prioritise availability of medication in the country.

In response to the request made by the Sri Lanka College of Cardiologists, Hemas Pharmaceutical Distribution business has collaborated with multiple stakeholders on a special project to address the need for training in Heart Failure clinical procedures. This initiative aims to provide comprehensive training to Cardiologists, Cardiology Medical Officers, and Nurses, ensuring that they are well-equipped to meet the challenges in the field.

In line with the strategic objective to drive the Morison branded portfolio, the Pharmaceutical Manufacturing Business, introduced 5 mg and 2.5 mg variants of ‘BisoMor’, a medication used in treatment of high blood pressure. The success of 'Empamor,' the flagship product for type 2 diabetes, as the top-selling empagliflozin brand in terms of volume, exemplifies the trust consumers have in the Morison brand.

Amidst heightened volumes and ongoing pipeline expansions, the 'Homagama' factory demonstrated commendable capacity utilisation in both tablet and liquid manufacturing, showcasing effective production management, with a targeted capacity utilisation of over 40 per cent by the end of the financial year.

Hospitals

Occupancy at both the hospitals remained high with over 60 per cent overall occupancy under improved medical admissions. Despite the decline in overall surgical admissions due to reduced disposable income, many key anchor specialties including Urology and Gastro-Enterology witnessed significant growth in value and volume terms.

Mobility

Amidst the global economic slowdown, the Port of Colombo demonstrated notable resilience with a significant increase of 7.8 per cent in total throughput and 11.5 per cent in transshipment volumes during the quarter, partially attributed to a lower base from the previous year. However, the Maritime sector was adversely impacted by the global slowdown, despite observing a greater extent of stabilisation in global freight rates.

The global demand for passenger air travel is on a growth trajectory, even though it has not yet reached pre-pandemic levels. While there has been a resurgence in travel from Colombo, particularly in student and labour travel, the cargo market faced a decline in volumes for perishables and general cargo to key markets.

During the quarter, the Mobility Sector achieved a revenue of Rs. 417.5 million. However, the operating profit and earnings experienced a contraction of over 40 per cent, reaching Rs. 224.5 million and Rs. 121.7 million, respectively, primarily due to the impacts of currency appreciation, volume decline, and reduced demand.