Hemas Holdings PLC (HHLN0000) Earnings Call Transcript & Summary

Good evening, everyone, and we warmly welcome you to the investor call for the quarter ended 31st December 2024. So on the call today, we have the Group CFO Moiz Rehmanjee; Sabrina Esufally, the Managing Director, Hemas, Consumer Brands; Dinesh Athapaththu, Managing Director, Morison; Ishani Ranasinghe, Head of Group Sustainability and Corporate Communication. So on the call today, we will be doing an overview of the macro economy, followed by an industry and business update, followed by financial performance of the group and ESG update. So to give the opening remarks, I would like to invite Moiz Rehmanjee.

Good afternoon, everybody. Thank you for joining the call. Before we get on to the business and then, of course, giving a view on the financial performance as well, just a bit of a recap on where we're coming from. The macros continue to get better over each quarter that we come and present to you all. AWPLR has dropped significantly in December 2024 by 3.5%, rupee has [ appreciated ] as well. In terms of commodity prices, palm oil, crude oil, they've all -- they've also a bit of an adverse movement during this 9-month period. And overall, even on the tax side, whilst we did see some increase happened in the early part of last calendar year, specifically, we are looking forward to some reliefs are going to come with the proposed budgets that are in the pipeline in the next few weeks. On a macro standpoint, in terms of ratings as well, the ISPs were restructured recently with Fitch, Sri Lanka got an upgrade on its rating from Fitch as well as from Moody's. From a political standpoint, we have -- we see a lot more stability in terms of the appointments and the elections that took place recently. And the signs are looking good in terms of consumer sentiment overall in the market. So the macros are good. Our financial performance reflect that as well, which will come into more detail in the later part of this discussion. So with that, I'll hand it back to Hazel.

Thanks, Moiz. So Sabrina, we'll kick off with you. How has the market evolved during this third quarter? And could you also elaborate on the trends that we have observed during this period?

Sure. So for the third quarter running, we saw an improvement in consumer sentiment. I think this is backed by increasing confidence in the government's policies, ramping up of private sector and, of course, strong performances by in the remittance and the tourism sector. So I think overall, this is good for consumer sentiment. And we're also seeing volumes starting to come back into the categories.

So also, Sabrina, would you be able to tell us explain the strategies that we have taken to combat competition and how to deal with the challenges that we have faced.

Sure. From a consumer standpoint, what we do see is evolving aspiration. And when aspiration is evolving, it's a really exciting time for a consumer business because we see lots of needs coming open in the market. And this really gives us a canvas to go in with strong innovation-driven growth. And we've really taken this as a license to improve our products, our propositions, our marketing mixes across the portfolio. We also completely reinvented a legacy brand, Velvet, not just in the packaging, but also in the formulation and the products that we have in the range, again, giving more for less. This idea that consumers want, they're okay with the price they're paying, but they want a lot more from manufacturers. So this is kind of what we've resolved to do. It has shown good traction in the market. We see decent growth both in terms of volume and in terms of share. We've also kind of improved our marketing mixes across the board, doing more in store, doing more activations on ground. Again, this is capturing a lot of the aspiration and the excitement that is coming loose from the consumer side. So that's, of course, on the front end. On the back end, we have continued to stay focused on our efforts to improve productivity and efficiency, both in our manufacturing and our supply chain parts of the business. Manufacturing has seen a really good improvement on its conversion cost, largely on the back of the automation investments we've been making in the factory over the last 2 years.

Okay. So how has the beauty segment also performed during the quarter?

Yes. So I think overall, in terms of the discretionary categories like beauty from an industry standpoint, we see these recovering much faster than the essential categories, of course, because they lost much more volume than some of the essential categories did over the crisis. However, because we are starting on a low base and we've come in with sort of strong first-to-market propositions in the beauty care space, we see growth close to 40% actually in face care, 30% in body care, well ahead of the category. And this is again a sign to say that consumers are -- they're feeling ready to buy into aspiration. They're willing to pay for products and services they feel are giving them more value and the performance of our beauty care really is a testament to that.

Also, if we just move on to -- in terms of Bangladesh, how is the present environment in Bangladesh? And how has Hemas responded to these challenges that are there in Bangladesh?

Yes. The macroeconomic outlook in Bangladesh continues to remain challenged. Inflation is continuing to increase. However, our business has actually managed to grow double digits in Bangladesh largely on the strong performance of hair oil, both in the Kumarika business, but also with the new brand that we launched, Eva. Eva is actually growing 3x ahead of the category. And so this is, I think, demonstrating that we have the ability to create resilient brands and a strong team on the ground that can convert that into good execution outcomes even in a difficult time.

Could you also give us some key insights on the performance of our learning segment during the quarter?

Yes. So the back-to-school segment is in season. The school season starts in January. And so this quarter really was about ramping up our propositions, both in the premium segment and in the economy segment. A ton of new innovation has come into the market, not just in the formal part of the business, but also in some of the [indiscernible] like EDU Toys. And so yes, we're looking forward to a strong recovery of the back-to-school segment as well. And market share, of course, has been defended over the period.

Thanks so much, Sabrina. So Dinesh, would you be able to tell us what were the most significant trends and the developments that were there in the health care industry over the past quarter?

Yes. I think in terms of the market, still we are seeing the growth, especially in terms of the volumes. But having said that -- and the latest IQVIA data is yet to be published. So we are -- in terms of the credible for this, we had to still go by the previous data. But having said that, by looking at the market trend, the trend of consumers moving for more affordable health care options is really seen in the market [indiscernible] brand shift that's happened. From the regulator or the ministry point of view, what we are seeing is things are improving in a greater scale, especially in [indiscernible] we have seen that they are clearing up a lot of backlogs and the registrations are much faster than what it used to be. And on the other hand, one significant thing happened over the last 6 months was in terms of the manufacturing business when the volumes are allocated, there was no proper level playing field that was established. But for the calendar year 2025, we saw the quantities were allocated on a fair basis. So the buyback agreements were renewed only for 1 year. But there are positive indications from the government that they are reconsidering and probably it will get renewed for a further 4 years. That's what we are expecting as an industry. On the other hand, we see especially from a regulator point of view, very proactive engagement with the chambers, especially in terms of setting up a pricing formula. The industry views have been heard for. So that's a positive thing which I see.

Thanks, Dinesh. So in this context, how has our pharmaceutical businesses performed during this quarter?

I think it was a good quarter. Pharma distribution business continued to hold the market-leading positions and they have performed well. From the pharma manufacturing business point of view, I think it was a good quarter for Morison, especially the [ pharmaceutical ] plant started manufacturing more and more. Now there are about 18 products that get manufactured there. And especially our entry into the branded segment with the [indiscernible] is still making a significant progress. So still, we are one of the largest selling brand in terms of -- within the [ Vasopressin ] category, we are one of the most selling brand. Apart from that, at Morison, we are taking the next steps to move into the cardiovascular segment. So those launches will happen in the Q4, especially with some of the hypertension drugs and the blood thinners will get launched. This is the first time manufactured in Sri Lanka. So exciting stuff for the team there. And apart from that, in terms of the profitability driver, the key focus is efficiency and productivity. There were many initiatives, especially at the manufacturing ramp that took place. So that's we see getting converted into the profitability. And in terms of working capital, also, we see Morison is getting into positive cash flows and adding that value to the business.

Also, do you foresee government incentives for the pharma manufacturing arena? And what impact would that have in terms of...

Yes. So I think if you specifically look at manufacturing point of view, there are no incentive as such announced as at now, officially. In fact, the manufacturing is still at not level playing field because the packing material and all the spare parts for the manufacturers are getting back, whereas the finished products are not better. But having said that, one advantage for us as a business, especially at our business at Morison because our investment took place before the economic crisis. So if at all, the same investment, if you have to do it right, right now, it's probably double of that investment cost. So investment is -- in the current context is lower. And pharma manufacturing is an industry that you need to be there for long haul. So what happened is that initial 4, 5 years has been passed, new formulas have been developed, start hitting the market now. So anyone who comes in and setting up also, it will take some time to set up. So it's not a matter of months, it's a matter of years. So in that way, I think if at all, incentives comes in for the interest is good. But having said that, the business that we are in, we have also set up and pass the difficult time. So I think there will be good times ahead. Thank you.

Thanks, Dinesh. Moiz, would you be able to highlight the new developments and achievements in our hospital business?

Sure. First of all, in terms of performance, hospitals as well together the rest of the health care cluster, profitability has improved during the quarter and quarter-on-quarter. There is a bit of a slack on the revenue, which is due to -- sorry, reduction in patient revenue. But this has been compensated by, again, the kind of mix that has been delivered by the business unit, especially in terms of surgical procedures, the kind of focus that the hospital is putting into the consultant-driven market traction towards the high-yield procedures and therefore, the margin improvements is yielding into the bottom line. And also, there's a heap of productivity improvements. Again, it hinges around the kind of investments they're making towards which kind of staff cost that actually yields the higher procedures that they carry out. So the productivity improvements overall in terms of the surgical mix that they're offering in the total services, all combined are adding value to the margins of hospital business, which is really making up for the loss of the inpatient revenue during this quarter. Apart from hospitals alone, overall, the whole health care cluster is driving quite a bit of profit growth during this quarter. But again, we'll come on that in a bit more detail as we go into the financial performance.

Let's also highlight the performance of the mobility sector.

Sure. So mobility again, as in the past, there are basically 2 key segments. One is the Aviation and the other one is Maritime. On Maritime, both, we have improved freight rates as well as volumes arising from both the imports and exports. The expansion of the Colombo port is going to positively impact the segment because it positions us well to capitalize on the growth and regional opportunities that exist by making the port of Colombo itself much more marketable in the whole industry. From the Aviation side, there is increase in cargo volume, but overall, the yield has declined. There is competition in the passenger segment specifically, mainly with the online segment, which has also a bit of a degree impact. But net-net, that segment has also performed well. And as mentioned in previous quarters, this is one of the segments which is a smaller part of the total group portfolio, but it yields high returns on capital employed, and it's a very cash-rich segment that is staying.

Thanks, Moiz. So let's elaborate on how the factors that we have discussed up to now have impacted our group's performance on a quarter-on-quarter and year-on-year basis.

Sure. First of all, if you look at the margins, which is where the quality of profits come in, you will see at every level, be it the GP margin, be it the EBIT margin, be it the PBT margin or the earnings margins, that's an improvement. The improvement is not only in the 3 months ending quarter 3, but also in the year-to-date 9 months compared to the previous year. This has been driven again with the same momentum that we have been driving in the rest of the current financial year, which is our productivity improvements, cost management, supply chain and very careful mix management. Mix management in the more profitable products that we -- and the categories that we want to drive and grow. And this strategy is applicable to all our segments, be it pharmaceutical, health care or be it in the consumer side. There's a lot of focus and attention going to driving the high-margin product categories and improving the mix of the overall revenue portfolio towards those categories. So overall, a lot of focus gone into margin improvement from all those angles. If you look at below PBT on the finance cost, also there's a significant reduction. It's coming on top of reduction in working capital as well, but also needless to say, on the back of a lot of interest rate reductions in the market. On the tax line item, you will see a significant increase, although it doesn't erode away the margins, but the increase is coming predominantly from dividend tax, which is merely a timing issue. There's an incremental dividend tax during the 9 months ending this year compared to the dividend tax we had in the same period the previous year. But on a full year basis, as we finish the financial year by March 2025, if you normalize and the effective income tax rate would be very similar compared to the previous year. Apart from that, you'll see overall, the balance sheet has also steadily improved as it has been doing over the past couple of quarters. Gearing has overall reduced again. And on the cash -- operating cash flow, you would see a slight reduction compared to the previous year same period, but that's merely on top of the working capital movements that take place midyear. But on a full year basis, we expect to see very good operating cash flow again. But most importantly, the key KPI to monitor on that measurement is on the balance sheet. And the gearing and overall debt ratios in the balance sheet has improved. Apart from the P&L and the balance sheet, the other usual metrics that go along with it, the EPS, the ROCE, all of them have been moving in the right direction. On a full year basis, there's a slight dip in the revenue, but that has definitely not had any trickle-down effect on the bottom line, as I mentioned earlier, bottom line performance has improved across every level. So with that, I'll hand it back to Hazel.

Thanks, Moiz. So moving to Ishani, would you be able to give us an update on the group's efforts related to environment and also social issues and explain how these initiatives have touched the lives of our stakeholders.

Thank you, Hazel. So at Hemas, we continue to entrench sustainability in our operations, and that meant that we have a strong foundation of sustainable practices as well as impactful environmental and social initiatives. So because of the way sustainability is entrenched and how our operations are carried out, last quarter, that is quarter 3, we were named as one of the Top Best Corporate Citizens at the Best Corporate Citizens Award. So our sustainability initiatives continue to help us mitigate risks as well as unlock new market opportunities in an evolving global landscape. So one such initiative we have is our plastic initiative. There, what we have looked at is basically to ensure that the plastic we put out to the market is collected back. And to date, we've collected over 1.2 million plastic because for us, responsible consumption of plastic is a key focus area in terms of our environmental agenda. Then on another hand, we've also focused on creating a sustainable and inclusive community. Here, we have impacted over 49,000 families in quarter 3, where we have focused on investing in programs and initiatives focused on quality learning that is to ensure that we lay a foundation for success. And then our health care and wellness programs are designed to build a healthier and a more resilient community. Then finally, some of the initiatives we did, we focused on supporting our vulnerable communities. And this is -- the reason we did this was to uplift these communities and foster social equity and inclusion.

Thanks, Ishani. So now we will open the webinar up for question and answers. So we have one question. It reads. First question is, can we explain in terms of our growth in Bangladesh in Taka?

Our Bangladesh business is growing in Taka [ term ]. So it's growing double digit in Taka [ term ].

Thanks, Sabrina. Also second question is what mainly caused the improvement in consumer margins given that there were no continuous sales promotions running throughout the financial year '23.

Given that there were continuous -- Okay. Yes. So I think for us, we have always competed out there in the market while ensuring that our performance is sustainable over time. So we knew that the market landscape was changing. And so we made sure that we did whatever we could in terms of value engineering, in terms of process improvement and in terms of cost-saving projects that we needed to do to not cause a negative impact on the margin. So our teams are very focused on ensuring that we give the right price and the right promotional intensity to the consumer while not compromising the business returns.

Moiz, there's a question in terms of equity accounted investees. If you can share in terms of during the quarter, what has really happened?

Yes. The lion's share of that is coming from our investment in [ BHP7 ] which is a leisure sector.

Also, there is a question on how sensitive is the health care margins for an LKR appreciation or depreciation?

Yes. So it's -- there's a sensitivity into it. So what happened is the health care segment is mostly price control. You have the maximum retail price control products and the products that is not controlled. Even if it is not controlled, any price increase, the regulator plays a role. So it's sensitive to an extent to which we need to continuously getting in touch with the regulator and get those adjustments on a timely basis.

Thank you, Dinesh. So there's a question in terms of the learning segment. How are you going to compete in the learning segment with the increasing competition as a result of relaxation of import restriction?

Yes. So here, the business is focused not just on giving the right price to the consumer, but also leveraging the brand and our strength in go-to-market. So if I look at -- from a pricing point of view, the business has launched into 2 pricing tiers, both in the discount segment and in the economy segment. So this helps to ensure that consumers at every price point have a choice that comes out of our business. Secondly, the strength that we have on our distribution side and our go-to-market in terms of direct distribution is something that will be very difficult for an imported player to come in and gain an advantage on. So our value to the retailer, I think, definitely puts us ahead. And then thirdly, of course, is the brand. So we've spent a lot over the years ensuring that we cultivate the right stakeholders that we go into schools that really the brand proposition is what attracts our consumer, and we will continue to do this while augmenting our purpose efforts around the brand so that we're more meaningful to the consumers that we serve. So those are the 3 reasons as to why I feel that we can stay ahead over the competition.

One more question for you, Sabrina. It reads for the benefit of equity analysts on the call, can we assume the pricing of Hemas [indiscernible] is in line with your wholesale price?

Yes. But I don't think it would make a huge difference. It contributes nothing to our top line.

Also Moiz, if you can help us with this question, what is the long-term strategy with hospitals?

Hospitals has certainly been earmarked for expansion. As we have mentioned in the past as well, one of the recent land acquisition as well alongside one of our hospitals. And the intent is to expand on that increase overall bed capacity and facilities. So that's clearly in the pipeline and the intent to expand on that vertical exists.

Thank you, Moiz. Dinesh, a question for you. It reads how many molecules are there in the pipeline to cater through the market before the financial year '25 ends?

We are planning for a few. Some of them are in the last stage of registration.

And also, what is the capacity utilization for the pharma plant look like during this quarter?

Yes. So again, I think I explained this a bit in previous calls also for us, capacity utilization is not a key KPI now. Why we are saying that is what is most important for a plant of that nature after making a significant investment, how you get your mix right to get the right product mix to get the margins right. So what we do is shift towards getting into the branded generic segment, although the capacity utilization is lower, if you are growing more in the branded segment, your margins are better. So you yield more. Your utilization is not playing a big role there if you fill the plant with the right means. So at the moment, our focus is significantly grow the branded segment invest there and meantime, ensure that we secure government buybacks and catering into that segment that will help us in capacity utilization in a certain way. So I can answer that question in a different way. At the moment, we have about 18 products that get manufactured at our new facility.

Thank you, Dinesh. Sabrina, there's a question. Have you tested Kumarika in other South Asian market? It seems to have international potential.

Yes, we constantly test Kumarika in other South Asian markets, and we're actually looking at entering a few markets on an export model over the next few months.

Also Moiz, a follow-up question in terms of hospitals, what is the update on land expansion in the hospital sector?

Well, the land has been acquired. So infrastructure is now been secured fast through the expansion. But it will be a fairly big expansion and expansion of this nature, need to go through the required internal DD before we actually go and execute on it. So which is in the pipeline, which is in the making. Hopefully, in the next few months, you could have a more specific update to you all on that one. But the intent to expand the hospital sector clearly is there.

So there's another question, Sabrina, for you in terms of volumes. How much has the Sri Lanka and Bangladesh consumer sector volumes improved during the last quarter?

Yes. So Sri Lanka and Bangladesh is a little different because of the seasonality. So in Sri Lanka, we've seen a double-digit growth in volume if I compare quarter 2 versus quarter 3, largely, I think, on the back of the seasonality over the December season. But that's a good sign that volumes are coming back. In Bangladesh, of course, it's winter, which is not a great season for hair oil. So quarter 2 was better than quarter 3, but they're certainly growing over quarter 3 last year.

Also, Moiz, I think we have captured this in some of our previous calls, but for the benefit of the person who asked the question, how are you planning to fund the hospital expansion?

It will be a mix of debt and equity. How much of debt we actually use for that would depend on the overall group gearing and the extent to which we want to leverage it. And given that we are hardly geared as of right now, there's a bit of room for us to pull that lever as well. But short answer to the question, it will be a combination of debt and equity.

Okay. And also there's a follow-up question. Has much of your $100 million being employed or firmly earmarked?

It is earmarked, right? The immediate response to that question. How much of it has been deployed Well, as a conglomerate, there are a couple of needs that we have in the pipeline in terms of M&A and other growth opportunities. How much of that materialize, it's not really very easy to give a specific time line to it. But we are confident we will make it happen in the next 2 to 3 years. But you will also note that our CapEx this year is at fairly record levels compared to historical averages. And those CapEx have been well funded, I would say, seamlessly funded with our equity cash flows itself. [indiscernible] operating cash flows. So whilst the $100 million [indiscernible] and the watches is there, the big CapEx we've incurred so far have been comfortably managed with our operating cash flows from our fairly defensive businesses. But as far as the big [indiscernible] are concerned, which in the pipeline, we will have more visibility and more to share with you all in the next few months and quarters to come.

Thank you, Moiz. Sabrina, a question for you. Could you shed some light in terms of the outlook and plans to hold market share in the home and personal care segment with increased competition?

So over the last few years, we've really been investing behind our competitive advantage, which is that we are able to localize global trends at a quality and a price point, I think, that is unmatched. And I think this puts us ahead not just of our multinational competition, but also our local competition. So this is something we've been quite intentional about both from an R&D point of view and from a marketing point of view. And so this is what makes us confident about our ability to gain share, not just in our existing categories, but also to make significant first-mover advantage in some of the categories we're not in today.

And one more question. Would you expect Atlas to significantly benefit by government stationary allowance?

So we still haven't seen exactly how it will be deployed. So I'll reserve my comments for when I see the [indiscernible].

And also, there's a question in terms of modern retailers in terms of them, do we see or experience extended credit terms or delays in payments?

This is sort of intrinsic to modern retail. I think so there is a different -- but we haven't seen a change in operating landscape from a retailer point of view. In fact, what we have seen is an increase in stand-alone modern trade. So you see lots of retailers that are investing in building their own stand-alone retailers across the country. And so you can see more capital going into the retail landscape. And what that's likely to mean is more competition in the modern trade retail and also better experiences for shoppers.

One more question in terms of learning segment, are benefits from schools reopening realized in the third quarter or fourth quarter?

It will be a combination of both.

I think we did touch base on this question, but it reads what is your strategy to compete with competitors coming in the personal care and home care market?

Yes, I think it's for Sri Lanka and do it on a global scale.

Also, there is another question in terms of volumes. Have volumes in key products under the personal and home care segments recovered back to pre-COVID or crisis levels in Sri Lanka and what is your volume growth expectations?

Yes. So they're definitely recovering. If I take a Q2 versus Q3 view, they're definitely on the upward trend. Have we got back to the volumes we were during pre-COVID? No, but I think it's getting there. And certainly, we see discretionary categories, as I said, recovering much faster than essential categories. And this is a good sign that consumers really are coming back into a consumption-led economy.

So I think we have covered all the questions that are really appearing in our chat box. So if there are any further queries, you could always drop us an e-mail on [email protected]. So Moiz inviting you to give us some closing remarks on the call.

Thanks. Well, in summary, a nutshell, you can see the total group portfolio is firing well. All the segments have reported growth. And as opposed to in the past where we had one cluster being launch of the growth. This year around, you see that has shifted to another cluster. So it's all testament to a healthy portfolio that always fires well and complements one another. We also mentioned after approach of the previous financial year that, that was a year where all our BUs ended up making profits, the individual BUs within the broader segments that you all see in the statutory results. So that trajectory has continued even in the current financial year-to-date, all BUs are in the green in terms of profitability, and we hope to further build and grow on that. As touched on earlier, we are very defensive sectors so -- which also translates to good cash flows in addition to profits and profit margins. And the operating cash flows have continued to be positive over the last few quarters and remain positive even as of right now. And we remain again committed to the 100 billion watches that we have earmarked for long-term LRP expansions. So on that note, thank you, everybody, for joining the call. I appreciate your interest and looking forward to speaking with you all again one quarter from now. Thank you.

Thank you, everyone, and we wish you a pleasant rest of the day.