Hemas Holdings PLC (HHLN0000) Earnings Call Transcript & Summary

Good evening, everyone. We warmly welcome you to the investor call for the first quarter of financial year '25-'26. So on the call today, we have Ashish Chandra, our Group CEO; Sabrina Esufally, Managing Director, Hemas Consumer Brands; Dinesh Athapaththu, Managing Director, Morison; Lakith Peiris, Managing Director, Hospitals; Mahesha Ranasoma, Managing Director, Hemas Pharmaceuticals; Moiz Rehmanjee, Group CFO; Rizny Faisal, Chief Strategy and Growth Officer; and Ishani Ranasinghe, Head of Group Sustainability and Corporate Communications. To start off the discussion today, I would like to invite Ashish to give his opening remarks.

Thanks, Hazel. First of all, thank you very much for all of you who have joined on the call. This is my first call with you guys at Hemas. And we will be presenting in this call our Q1 results, and we'll be taking questions from you to help you understand our results much better. But to give you a brief how the quarter has been for us, it was a solid quarter for us, which is in line with the sustained trajectory of growth that we have seen in the last year. We delivered LKR 28.6 billion top line revenue growth. We delivered LKR 2.1 billion operating profit, and we delivered LKR 1.2 billion net profit, which is 26% growth year-on-year for this quarter. Our growth is mainly driven by the top line growing very well for us, improvement in the gross margins and reduced financial costs. If I look at each sector, we have performed well in most of the sectors. Our biggest growth came in the health care, which is driven by the top line revenues. In the pharmaceutical distribution, manufacturing, hospitals, our consumer brands, we continue to grow our margins despite all the pricing challenges that we face in this particular year. In the Learning segments, we keep our leadership intact. We continue growing on that aspect. On the mobility sector of us, it is driven mainly by the growth in the cargo areas, which is doing well both in maritime and airline. And we continue to keep investing in the sustainability aspect, and we have now expanded it from purely plastic waste management to now also renewable energy being brought into in a big way in this. We look at the economic condition in Sri Lanka to be stabilizing now with the Q1 showing a good growth quarter-on-quarter in terms of economy. We are pretty cognizant of the challenges that the country faces today or probably will face with the new tariff implementation happening and the fluctuation in the commodity prices. But we'll keep a close watch on it and see how we continue to perform under this environment, which is -- which we'll see how it grows over a period of time. As we grow into this or go into this year, we continue to keep investing in our pharmaceutical manufacturing, expanding our hospital capacities and trying to localize all our productions. We will also continue to keep looking at opportunities outside Sri Lanka if there are anything which comes up our way. So that's the broad overview of the performance of the Q1 for us. And we will now, over the next 45 to 50 minutes, would like to explain to you the performance, how it's been.

Thank you, Ashish. Moving on to the macroeconomic performance. Moiz, can you please provide us an update on the macroeconomic situation of the country?

Sure. Thanks, Hazel. Well, on the macro side, if you take the key variables, interest rate, exchange rate, inflation/deflation, we've held pretty much stable as we have in the past few quarters. So no big significant fluctuation in those areas that need -- that have a big impact on business. On the positive side, GDP growth, we can see that is turning a positive turn from the negative growth that have been there in the past. And of course, the biggest swinger right now is the share market performance, which, as we all know, has increased tremendously year-to-date and also in the last 12 months altogether. On the commodities, there is some increase happening on the crude oil side. But again, it's not a big swinger that affects our overall performance. So overall macros have held quite well, and we expect the stability to continue the next few quarters at the same time.

Thanks, Moiz. So amidst the challenging competitive environment, the Consumer Brands business recorded marginally lower revenue during the quarter. So Sabrina, can you give us an insight into the performance of the first quarter, including volume growth?

Sure. Thanks, Hazel. So after an intense period of volatility that we saw on the back of pricing reductions last year, quarter 1 was actually much more stable from a market point of view. We see a process where the industry seems to be consolidating, and that's good news for the branded segment of the market. Our performance is explained by our continued focus on sharpening our portfolio around Beauty and Personal Care segments. We actually discontinued in quarter 1 lower-margin categories in our Laundry Care segment. So if you take the underlying performance of the business, we're actually seeing decent growth in our Personal Care, Beauty and Personal Wash segments. The revenue loss is explained because we discontinued some categories in the Laundry Care segment.

Thanks, Sabrina. So with the macroeconomic situation improving in Bangladesh, how has the business evolved there?

Yes. So Bangladesh macros are also getting much more stable. We see inflation coming down. Interest rates are stable. And our business there has been performing quite well. We're seeing 15% growth quarter-on-quarter, largely on the back of strong performance in our Branded Hair Oil segment and good performance of some of the NPDs that we've been launching over the last 18 months.

Okay. So let's move to the Learning segment. So our Learning segment introduced several educational toys during the last year under the PlayPalz range. So what has been the market response for these segment?

Yes, this is a really exciting segment for us because we see the early childhood development space as being a vacant space in the Sri Lankan context. This gives us a real opportunity as a learning business to innovate into this segment. So over the last 12 -- sorry, 6 months, the team has launched 12 new SKUs in the early learning segment under the brand PlayPalz. And we've had decent traction. We've educated over 4,000 preschool teachers on the importance of this category, and we've managed to get into 2,000 booklets. So early signs seems to be good, and this is a category we hope to build for the future.

Thanks, Sabrina. So Mahesha, will you be able to provide an overview of the performance of the pharmaceutical distribution business during the quarter and also share your thoughts on the newly issued gazette on the pricing mechanism for medicine.

In terms of the quarter performance, we were able to do far better than year-on-year based on the -- compared to previous quarter in the last year, mainly because we were able to deepen the relationships with our principals and generate new business, but we were also able to commercialize some of the new products that were pending approval to this quarter, and that gave us a boost in our sales. On the pricing side, yes, there was a pricing gazette that was issued by the regulator. And then it was withdrawn because it lapsed the -- technically the time to present that to the parliament. So what we have right now is the reissuance of the same gazette in terms of pricing. So we will see to work with the authorities on how best we can get to a better pricing regime.

Thanks, Mahesha. So moving on to Dinesh. What have been the new developments in the pharmaceutical manufacturing industry? And how has the business progressed this year?

Thanks, Hazel. So I think from a pharmaceutical manufacturing industry point of view, I think industry is growing in the back of the capacity that was added over the last couple of years in the country. And the supplies to -- especially on the government segment, the supplies to government from local manufacturers were intact and it is growing. However, the challenge that the industry is facing is the certainty and the consistency of the policies. There's no certainty about the extension of the buyback agreement signed with most of the manufacturers, which is set to be expire in this year, December. So what we are hearing is government is considering to extend it by 1 year, but the industry view is that we need a more longer-term buyback extension. So on that light, Sri Lankan Pharmaceutical Manufacturing Association launched a road map, pushing the authorities and all stakeholders to come together and what is required to take the industry to the next level. So that's been presented in the last AGM. I think the policymakers' attention will get there, and that's pretty much on the industry. From a pharmaceutical manufacturing business point of view, I think Morison had a good quarter in terms of the volume growth and the sales growth. Especially apart from our government supply, our Morison branded ranges continue to grow. [indiscernible] still keeping our market leadership position. And on top of that, whatever the new products that we introduced to our cardiovascular segment has started getting a reasonable traction. So that's about it.

Thanks a lot, Dinesh. So there have been a number of new initiatives undertaken by the hospital segment during the last months. So Lakith, would you briefly elaborate on them and also give us a snapshot of the operational and financial performance of the segment during the quarter?

Yes, Hazel. During Q1, Hemas, especially Hemas Wattala made a significant lead by commissioning Sri Lanka's most up-to-date technologically advanced catheterization lab in this country. And with that, Hemas also became the first hospital to offer such capability in the Gampaha district as well. Now with the establishment of the cath lab, we go into advanced interventional cardiology services. And we also saw that -- I mean, we have had exceptional traction during Q1 from the time that it's been launched. And apart from the technological advances, apart from a robust clinical governance structure and protocols on global standards, we also offered a very unique clinical value proposition for the clinicians as well as to the patients. And that is a 60-minute door-to-balloon time where we will be able to save many lives. It's a standard that is much greater or much better compared to the global standards, which is a 90 minutes. And we have also seen excellent performance of the cath lab. We have already gone beyond -- above and beyond our feasibility numbers, patient volumes, and we have also been able to attract some of the most reputed interventional cardiologists into the system. Secondly, we also launched our premier OPD facility once again at Wattala. It's about redefining patient experience in OPD facility. It consists of a dedicated pediatric center, our cosmetic clinic where the brand is Adora and a wellness center. But most importantly, the first liver center has been launched in the country. So it's a first to Sri Lanka. The liver center is managed by a multidisciplinary team of clinicians and the center is able to offer both pediatric and adult hepatology services. And we are quite hopeful that this liver center will transform itself as a national asset. And going back to your other question about performance, continuing from an excellent -- I mean, excellent results during previous year, we also continued the positive momentum through the Q1 of this year, and -- where we were able to outperform all financial KPIs. The hospital's group recorded top line growth of 28%, driven by both the IP services and OP services, where our IP services grew by 28% and OP services grew by 27%. Another highlight during Q1 is that we were able to record the all-time high surgical volumes during the quarter. And both Hemas Wattala and Thalawathugoda continue to be hotspots for channeling, and we have grown the footfall by 27%. So apart from the two hospitals, coming to the laboratories. Laboratories also performed exceptionally well during Q1, once again, with a 27% top line growth compared to the same period last year and also a 34% growth in terms of test volumes. So we have had a good Q1, and we continue to -- we are hopeful that we will continue the same momentum.

Thank you, Lakith. So Moiz, would you be able to provide the key highlights on the performance of the mobility sector during the quarter?

Sure, Hazel. On mobility sector, it's been pretty much short and sweet. Overall, cargo volumes have been high and the maritime rates have pretty much stabilized compared to last year and exchange rates have also been quite stable. On the passenger side, on the other hand, there is some competition on the volumes, but rates have overall helped. But all combined within that cluster, performance has remained steady in absolute terms and also in relative terms in terms of returns.

Thanks, Moiz. So moving on to Rizny. Would you be able to provide us an update in terms of the key operational milestones we have achieved in the newly established SLIIT Hemas Allied Health Sciences Institute.

Thanks, Hazel. So in terms of the joint venture itself, it was completed in April. It's a 50-50 joint venture between us and SLIIT, focusing on allied health sciences. It's been relatively small, but we've had decent success. We've already reached breakeven in [indiscernible] markets. And in terms of number of students, we've hit 400 students in the first couple of batches itself. We're focusing currently on nursing, psychology as well as biomedical sciences. It's our foray into tertiary education, which we feel is a segment that Hemas will move forward.

Thanks a lot, Rizny. So Moiz, considering the performance of the sectors which we have discussed, will you be able to provide an overview of the company's quarterly performance?

Sure. Well, starting off with overall, the P&L performance has been very good, beginning with the revenue top line itself where the growth has been there, which trickles all the way down to the bottom line, not just in absolute terms, but also in margins. You'll see that there's an improvement in GP margin, which goes all the way down to the PBT margin as well as the earnings margin. So the benefits of the operational MainCo deliveries on revenue as well as managing the whole execution efficiency has also been further enhanced with other improvements that have come in, in terms of effective finance costs, effective income tax rates. On the finance cost side, yes, there's a benefit on the macro side itself compared to what the average interest rate was in the same quarter previous year. But that apart, you'll see that also from our balance sheet, which is also reflected in the cash flow statement, there's an overall working capital improvement that has happened in quarter 1. And that reflects well in our balance sheet where you see the overall net gearing coming down. So the focus that we put on improving the balance sheet over the last 2 years, that momentum has continued to see the benefit of that further flowing into quarter 1 of this financial year as well. On the income tax side, it's pretty much a combination of the portfolio within which the profits are being generated. So as you heard in some of the previous sections of segments of today's meeting, the profitability improvement coming from business units such as Morison and a few others where the effective income tax rates are more competitive given either past tax losses or income tax concession rates. So that portfolio mix of profitability from more tax-efficient companies, the mix has improved, which is also helping the effective income tax rate of the group. And that apart, the whole quarter-on-quarter performance, I should also add that if you take our quarter 1 performance of this year and you just compare with the quarter 1 performance for the past 2 years or so -- 2 to 3 years, overall margin improvement has continued the same as it has in the last few successive quarters. And that apart, all the performance of the business has reflected in the improvement of the share price, which you have seen has seen 80-plus percent growth in this financial year as opposed to the overall market, which is roughly around 50%. So that has been the overall financial performance, right, of the group in the quarter that we just concluded.

Thanks a lot, Moiz. So Ishani, how have the Hemas initiatives related to the environmental and social aspects progressed during the quarter and what are the milestones that are planned to be achieved during the coming quarters?

Thanks, Hazel. So our environmental agenda 2030 remains our core sustainability pillar, and it's our long-term commitment to our sustainable operations. So during the quarter, we made significant progress in our FY '26 milestones. So we focused on collecting back our plastic, our energy, then one of the key areas we are working on is a reduction of our water intensity. And we are well on our way to achieve the FY '26 milestones for this. From a social side, we have impacted over 25,700 families through our social projects. And this is along with the key three focus areas we have, that is to create equal learning opportunities, supporting health and well-being and empowering vulnerable communities. So in these three pillars, I would like to kind of pull out one project we did this quarter, and that is the certificate course in diabetes care, which is done by the Morison team. So here, the project addresses an issue that is a core issue in our communities. That is the limited access communities have for specialized diabetes care. So to address this critical gap, what Morison did was they collaborated with the College of Endocrinologists to launch a certificate course in diabetes, and this was for the general practitioners. So to date, during the quarter, we trained 120 doctors. And in the upcoming quarter, there's 70 more signed up for it as well. So this is a national scale initiative that Morison is doing, and this is to make health care more accessible. Then overall, if you look at the next upcoming quarters, we are going to keep our focus on sustainability-related risk and opportunities. And here, we are going to kind of address what is material to us and also understand the financial impact it has on our business as well. Thanks.

Thanks a lot, Ishani. So let's move to the Q&A that has been -- is available in our chat box.

Okay. Sabrina, let's start off the first question with you. What are the strategies taken by HHL to counter new consumer sentiment and competition?

So with Sri Lanka's improving macroeconomic conditions, we actually see consumers doing two things. One is we see them prioritizing quality much more if you compare the last few quarters, which is why it's a really good time to refresh some of our legacy brands. So that's in terms of their product efficacy, in terms of their propositions, that's a big focus for us this year. But also, we see the discretionary spending going up. So consumers are willing to pay more for premium offerings, particularly on the beauty care side of the portfolio. So again, this is something that we want to double down on in terms of innovations, propositions and products. So just to summarize, one is to really grow share in our core business. And the second one is to innovate aggressively in the more premium segments of the BPC market.

Thanks, Sabrina. Dinesh, if we can take this question, did Hemas receive any NMRA approvals for medicines during the past 1.5 years?

Yes, sure. So I'll answer it in terms of the manufacturing point of view. I think, yes, we did. We did a number of dossiers that was put for approval come, but there was a reasonable -- it was reasonable, but the delays are still exist. So -- but we are getting approvals, can also contribute. So we are getting approvals.

Thanks a lot. Sabrina, if you could take this question, it reads how does the market share of Atlas compare year-on-year?

So Atlas has actually seen a marginal improvement in share, if you look at it year-on-year. And we still hold a significant position of dominance in the market.

Thanks, Sabrina. Lakith, if you could help us with this question, it reads, what is the mix of premium to generic OPD?

Yes. So it's a little too early to answer this question because it's been only 3 months since we have opened the premier center. But the early traction is really good. We get -- we actually get a new profile of customers walking into the premier center. And it will also benefit in terms of elevating the consumer profile of Hemas Wattala. So it's a little too early to understand what is the additional yield that it will provide. And over a period of time when we gain traction, we will really know what that mix is.

Thanks, Lakith. Sabrina, another question to you. What was the volume growth of the Consumer segment during the quarter?

Yes. So we have seen -- as I said, we've seen volume growth led by our Personal Care segment on the back of categories like sanitary napkins, body care and face care doing really well, actually double-digit growth, and also volume growth in our Personal Wash segment. The declines that we saw really came from the Laundry segment on the back of us exiting categories like laundry soap and mid-tier powders.

Thanks, Sabrina. Moiz, there's a question on health care. To get a better understanding of the health care segment, can you get some insights as to which are higher-margin businesses?

Sure. So if you talk of the Healthcare segment, there are broadly three main business units. You have the pharma manufacturing, within which the key shift has been the increased move towards the branded manufactured pharma, which drives much more significant margins compared to the other businesses within pharma manufacturing. Then within hospitals, you have all the more value-added services and treatments, which the hospital space is getting into, which Lakith spoke and elaborated on quite a bit earlier on. And then on the pharma distributor side, which is the largest piece, it's been a continuous drive of productivity improvements, which we got on to over the last few quarters itself and that momentum continues. So these are the three salient margin improvements within these three distinct business units within the health care cluster that altogether contributed towards overall margin improvements.

Thanks, Moiz. Sabrina, another question to you. Did Atlas benefit from the government stationery allowance?

Yes. So how it works is the stationary allowance has to get redeemed. And so I think this one, we will know closer to the season -- season to what extent it's being utilized.

And a follow-up question also, were there any price adjustments made during the quarter for consumer products?

So there were no price adjustments made in the specific quarter. But if you look at quarter 1 last year versus quarter 1 this year, there has been a price reduction made both in our personal wash business and in our laundry business since then.

Dinesh, a question to you. What was the capacity utilization of the plant?

[indiscernible] Morison. Yes. So I mean, I think I've been explaining this a couple of times in investor calls as well. Capacity utilization is decent in Homagama plant is kind of improving from quarter-to-quarter. But having said that, key focus is bringing the right mix of products into the plant, which is what happened with our shift to moving into the branded generic segment. What matters is we use the capacity for the right product mix. So that's our focus.

Thanks, Dinesh. Also, there's a question in terms of how many new molecules are in the pipeline to cater to the market in the coming quarter?

Yes. There are a few in the registration and a few in our stability chambers that are due to be submitted for registration.

Rizny, if you can take this question, what are the expansion plans in the consumer health care businesses?

I think we're going back to LRP here, there's $100 million that we mentioned. So in terms of existing businesses itself, three businesses we have said, Morison in terms of personal care and hospitals, we are seeing organic developments coming through. As a group, we are continuing to look at inorganic measures as well. At this point of time, there's nothing that we could disclose.

Thanks, Rizny. Lakith, there's a question in terms of -- I saw Hemas branded hospital in Wellawatta. Can you explain the business model and any further expansion plans?

Yes. So hospitals have got into the primary care segment of health care. It's mostly done to make sure that health care costs are lowered for the people of Sri Lanka. And right now, we are piloting three different models. One is the one that you saw in Wellawatta -- so primary care is the first line of treatment in health care. So we have a pharmacy, we have our labs, we have some of the very good doctors coming in, so the channeling can be done. So all those basic services are there. Yes, we are expanding. We have one at Athurugiriya, another one in Gampaha. We want to align ourselves in primary care to the government's vision of putting up 200 primary care centers in the country. And we also believe that primary care is something that is needed in this country, which is really an underdeveloped area. So we will be expanding. And so what you saw is one pilot that we have started.

Thanks, Lakith. Dinesh, there is a question. Will the commencement of the state run Synergy Pharma be a material threat in the pharma segment?

Yes. So I think this is a facility still under construction and in the qualification stage. So it will take some time to come. It's not a state segment. It's a SPMC joint venture that -- is actually a private entity who is going to supply to SPMC. So in my view, in terms of commercial operation itself some time away. And if at all, if it comes, I think predominantly, they are focusing on the government supplies, whereas Morison we shifted and our core focus is now building brands in private market and targeting exports. So I don't think there is a reasonable impact. But on the other way, we are happy that more manufacturing capacity coming into the country, that means as a country, our manufacturing capabilities and the scale will improve.

There are two other questions also for you, Dinesh. One is, did you see an improvement in the contribution of local pharmaceutical manufacturers to the private sector?

Yes, there's improvement over the last 3 quarters, I would say. More and more companies have started coming into the private segment. I think Morison is leading the way by launching some of the new molecules.

And also, there's another question. How many molecules are currently being manufactured in the Homagama plant?

We have 22 plus.

Lakith, there's a question for you regarding liver care patients and what more investment will be needed for a comprehensive liver care center?

Yes. So the current problem in this country is that liver transplant is an area that is of importance, but there is very high mortality when we do liver transplant. So what we have done is at the dedicated liver center, we focus a lot on the diagnosis and the next phase is going to be liver transplants and so on. But more than a profit, it is something that is needed. It is a gap that Sri Lanka is right now. Most of the liver patients have to go overseas. So more than a profit objective, I'm sure the profit is going to be a byproduct of this particular initiative. But our intentions are very clear is to make sure that to fill a current gap in the health care system.

Also, Mahesha, there's a question on if you can give your thoughts in terms of the competition that's really there in the health care segment.

Yes. From a pharma point of view, there is fairly healthy competition there in terms of the larger players, particularly I'm talking from an importer point of view. And also the local manufacturing is picking up. So that's good for the country, and it's also offering possible manufacturing opportunities for the principals who are overseas, so we can capitalize on that. So overall, it's fairly a decent market that's growing.

Dinesh and Lakith, if you also like to give some comments from your end in terms of the competition that's there in health care segment?

Yes. I mean I'll just endorse what Mahesha has said, some healthy competition between the importers and local manufacturing is picking up.

So where hospitals are concerned, once again, there is healthy competition amongst the major hospital players. And we also see that through the association and through collaboration, we also have the opportunity of helping out smaller scale hospitals. And so it's a good market to be in.

Thanks, Lakith. So we have answered all the questions that are available in the chat box at the moment. So if there are any further queries, we'd like to help you. You can always drop an e-mail to [email protected]. So I'd like to invite Ashish to give final remarks.

So thank you very much, everybody, for answering the questions. I think all the investors would have got their answers and would have understand how the performance has been and what are the underlying cause of these performances. As we have shared in the last time also that our future growth is guided by our long-range plan that we have set for ourselves with a lot of appetite for new investments, both in the local as well as international markets. We are exploring opportunity, and we shall come back to you as soon as we finalize any one of them. But we are very positive about the coming 3 quarters looking at the macroeconomic conditions in the country, and we plan to continue and sustain the growth momentum that we have seen in the last year and this year, too. Thank you very much for all your support. Thank you very much for joining this call.