Ansell Limited

Welcome to Ansell's Financial Year 2022 results webcast for the half year ended 31st of December 2021. I'm Anita Chow, Head of Investor Relations at Ansell. Joining us on the webcast today, we have Neil Salmon, our Managing Director and Chief Executive Officer, and Zubair Javed, our Chief Financial Officer. The materials we will be discussing today have been lodged with the Australian Stock Exchange and can also be found on the investor relations section of our website. Before we start, I have two additional housekeeping points. Firstly, could you take a minute to read the disclaimer on slide two? And secondly, if you would like to ask any questions, can you please type them in the Q&A box in the webcast? And for those on the telephone line, please press star one. We will be addressing questions at the end of the session. Thank you. And with that, I will now hand over to Neil Salmon to start the session.

Thanks, Anita. And thanks to you all for your interest in Ansell today. I'll begin with a business update, then I'll hand over to Zubair, who will go into more detail on our financials. I'll conclude with a look ahead and then we'll take your questions. So at Ansell, everything we do can be summed up under our mission, Ansell Protects. We create customer value through the protection we provide to the wearers of our products, but Ansell Protects begins with the safety of the workers involved in our manufacturing and administrative tasks. You've seen on this slide before stats we shared with you benchmarking our injury performance against global peers, and that continues to show a very good record. But on this slide, I wanted to go a little deeper and show how we're particularly focused now on addressing unsafe conditions, unsafe acts before they lead to an injury occurrence. So our focus is on increasing the reporting of those acts and conditions and addressing them so that we eliminate the risk of injury rather than just focus on that lagging injury indicator. Good progress here, but further work to be done. Of course, continuing is a key focus of safety, is on COVID-19 protocols. And I'm very proud of our teams here. Consistently, we've been seen as setting the benchmark in the countries in which we operate, establishing new best practices, which others have then also adopted. Now, let me turn to the next stage and a further aspect of our Ancil Protects mission. Can you go ahead in slides, Anita? Thank you. So Ansell Protect is also about ensuring that the workers across our supply chain have their rights protected and work in appropriate and safe conditions. Ansell Protect also means protecting the environment and delivering protection solutions to our customers at no cost to the environment. Significant focus for us on these activities, which here I group under social compliance. As we announced earlier in the year, we've increased our resourcing in this area. We've established a new supplier management framework that we've developed with reference to international benchmarks. Having completed a risk assessment, we are now onboarding wave one suppliers covering areas such as finished goods, cotton, and some of the agencies that we use. The increased resource in this area gives us increased insight into the activities of these suppliers and ensuring that they are acting in accordance to ANSEL's code of conduct. We continue supplier auditing according to the SMETA framework that focuses on those indicators of forced labour. And what I'm encouraged about is the increased rate of closeout of previously identified non-conformances. In our previous reporting, we said that the rate of closeout had been slowed by COVID restrictions on visiting sites and that pace of closeout is now improving and supports my view that the industry overall is making important progress against these benchmarks. Internal awareness is key too. We've launched significant company-wide training under the headings of sustainability, including a focus on ensuring all Ansell employees understand what gives rise to conditions of modern slavery, what the risks are and how we mitigate them. And then ensuring we know what's on the minds of our workers is fundamental. We've enhanced our global grievance policy, and we're complementing this with a series of approaches that make it easier for employees to get feedback to us confidentially, without fear of retaliation, and also understanding that any issues they raise will be investigated and will be addressed appropriately. With regards to the environment, we've talked before about our significant investment program, reducing Ansell Scope 1 and Scope 2 emissions. I feel we're already moving into a leadership position in our industry on the steps we're taking to reduce Scope 1 and Scope 2. Over the last few months, we spent quite a bit of work understanding our Scope 3. So those are the emissions outside of the Ansell footprint related to the raw materials we consume and what happens to our products after we produce them and sell them to customers. As with many manufacturers and industries similar to ours, Scope 3 emissions are by far the majority of our carbon footprint. So we now understand the causes of those emissions and we're beginning to develop strategies for abatement across the major categories giving rise to these emissions. We make good progress against our zero waste to landfill objective. As a reminder, our goal by the end of calendar 2023 is that all our sites, all our manufacturing sites will be certified with zero waste to landfill. In the recent period, two more sites achieved that certification. And by the end of this fiscal year, we expect two other sites will have achieved zero waste and will then enter the certification process. We continue to invest against our carbon and water efficiency initiatives, solar panel installations now complete in Portugal and Malaysia, other installations in the planning stage. And lastly, but perhaps most significantly, we're really stepping up our product stewardship activities, looking at innovating using more sustainable materials with lower carbon footprint than products available in the market today. and also a series of initiatives advancing our packaging pledge that by 2026, 100% of packaging material will be recyclable, reusable, or combustible. Let's turn to the next page now, and I'll now focus more on our business and financial performance. Before I dive into the year-on-year comparison, though, I wanted to start with a broader perspective and looking at our progress over two years. Yes, I'm about to describe to you the reasons why EBIT is lower on the previous half. But over two years, we see 23% EBIT and EPS growth and 34% sales growth. And what's very important about that two-year story is that it's come across our businesses. Those that have had a pandemic benefit, those that haven't. And that consistent and solid base of improvement over this time period is what gives me confidence that Ansell has come a long way over this time and has the foundation to continue growth into the future. Focusing now on the half-on-half comparison, sales growth for 7.5% all arose within the healthcare business. We saw higher demand in surgical and life science. The exam and single use also reported higher revenue. In the case of that business, though, it was on higher pricing. Pricing is down versus the peak levels at the end of last year, but still higher on average in the half versus the prior half. The industrial business saw growth in mechanical, but that was more than offset by lower sales in chemical. The decline in EBIT margins arose entirely in the healthcare business, and here the major contributor was softer demand. How does softer demand contribute to lower margins? Well, it's because we have had a greater proportion of our sales met from inventory purchased some months ago when market prices were quite a bit higher than the selling prices we are achieving today. This is a temporary inventory lag effect, and we'll give you some more color on that in a moment. So now let me dive into the SBUs in a little more detail. Further comments on exam, first of all. So as I mentioned, the revenue growth here is a function of price. But within volume, I want to split out internally manufactured from outsourced. You'll remember we've invested significantly behind our internally manufactured range with touch and tough technology oriented to industrial end markets where chemical protection is key to the workers and where we think we have significant differentiation. And even in these very challenging market conditions, we saw healthy volume growth on these styles that's generating good returns on the capacity investments we've made. It was the outsourced products where we saw volumes decline. How has this arisen? We'll have to take you back to last year. End users and distributors were anxious about securing sufficient supply instead of very tight market. Then around the middle of the calendar year, the beginning of our fiscal year, additional supply came onto the market at the same time that consumption stepped down a little as COVID protocols were adjusted and the early waves of the pandemic passed. Quite suddenly, therefore, end users and distributors found themselves in an overstock position, at least as reported to us. With now an expectation that prices would fall from here, of course, it's in the interest of end users and distributors to work away that excess inventory, and they no longer are under such pressure to reorder. We predicted this curve, but the step down in demand has been quite a bit steeper than we predicted. And that's a significant factor to the outcome of the half versus our expectation. Turning to other SBUs. So surgical continued strong performance Great track record over the two years that I'm showing here. And indeed, demand was not the limiting factor. Supply was the limiting factor for revenue growth in this business in the half. I'll talk later to the disruption in manufacturing that has curtailed our growth. The demand environment remains very encouraging for this business. We see that in both emerging markets where the Ansell premium brand is clearly of relevance and also share gains on higher margin synthetic products to mature markets. And of course, this is only possible because of our long term capacity investment strategy with investments in Sri Lanka and Malaysia generating very strong returns. LifeSan is also a business where demand exceeds currently our ability to supply. And we also see customers becoming more demanding. They want higher value, they want greater protection, and they also want to work with partners who can give them confidence across the supply chain. And Ansell is in a very strong competitive position to be able to do that. So we continue to increase capacity in this business as well. Cleanroom packaging, sterilization, and also the production of the underlying gloves and clothing that are key to a life science environment. Our mechanical business recorded solid growth in the half and improving over the last couple of years where they've seen challenging industrial end markets. That growth also supported by investments in differentiated platforms. And I'm encouraged by where we're winning new business, particularly in verticals such as EV manufacturing, which of course we expect to be significant drivers of growth for the future. Mature markets overall were lower. The automotive sector, as you're well aware, was affected by chip shortages and manufacturing overall was also affected by logistics delays. So the growth came from emerging markets, particularly in Latin America, where we saw very strong market progress in this business. So chemical, the only business with sales lower year on year, like exam single use, that's on lower demand in the products that were most in demand during the peak COVID period. And chemical does not have that same year-over-year pricing benefit than exam has as prices are already back to their pre-COVID levels. But we do see encouraging consumer interest, particularly in our higher end chemical solutions. And I'll comment on one of those in a moment. So now let me give you a few more details of the work that we're doing that will be important to our future growth. Not many of the words on this page were material to our first half result, but I think all of them are material to our future growth. Back to Ansell Protects. What's key is that we're bringing new protection solutions against important unmet safety challenges in the workplace. Ergonomic injury, a particularly challenging cause of injury that there aren't good solutions for. IntelliForce brings sensors to the glove that allows health and safety operators to understand what are the motions that give risk to ergonomic injury, how can they anticipate and address them. We're in the customer pilot phase with many leading players in the space. These are complex solutions to get right. If we can, the financial benefit to our customers is very significant. The two middle products are about combining multiple protection in one solution. That makes the challenge of safety easier, And it also means in areas of the manufacturing environment where previously the requirement to protect was too cumbersome, wouldn't work for the workers, now we're bringing solutions that do work. For example, the R840 there, it's a lightweight impact glove. It's a product that doesn't exist in the market today, and it allows an additional level of protection in areas where it's needed, but there just haven't been solutions before. Protection is also about reaching end users. And in the middle column here, we're doing some pretty important work to extend our reach. At the bottom, I talk about emerging markets, a longstanding success of Ansell Strategy. And I'd call out particular India. A couple of years ago, we weren't sure how big the market was for a premium branded player such as us. We've over-delivered consistently since that increased focus, and I'm now very confident that there is a premium brand position for us in India. And as you've seen, we continue to invest behind that very large market. At the top of the page, I talk about extending our reach through online marketplaces. Pretty much every Ansell employee has a story about handing a pair of Ansell gloves to a contractor or a repairman doing work on our houses. The experience is always the same. These are so much better than any I can get myself. Where do I buy them? Well, now we're developing solutions to that answer by extending our presence on online marketplaces, but also facilitating our distributors with their own digital strategies. And I believe this is a key area for future growth. And then to the right, and we've talked about this before, I won't go into details here, but we do believe that extending our manufacturing leadership on differentiated technology, but also productive scale lines is key to our future and is of increased value to our customers than it was in the past. Now let me talk a little bit more about the supply chain challenges that we have experienced over the last six months. So very dynamic operating environment and credit to our teams. They've been working incredibly hard for you over these last six months and for our customers to ensure the best possible outcome in a very, very difficult and surprising external environment. You'll be aware that at the beginning of this year, we talked about intermittent shutdowns that we were experiencing at our manufacturing facilities in Southeast Asia as countries responded to what at that time was the Delta wave of COVID-19. We managed to restore production at those facilities fairly soon after our FY21 results announcement. But our plans to catch up on that lost production were subsequently made more difficult by difficulty recruiting sufficient workers. And of course, availability of workers is also compounded by COVID-19 isolation requirements. And so we've experienced staffing shortages, mainly in Malaysia and Thailand, and that particularly constrains packaging, which is the highest labour activity in our manufacturing processes. And then although we had hoped that logistic conditions would stabilize, in fact, we've seen continued extended delays resulting in shipping delays, but also higher freight costs. And in just the last two months of the half, we saw $20 million of sales that should have booked in the half slip over into the second half because of these delays. So how are conditions now as we begin the second half of our fiscal year? Well, as you're aware, the Omicron wave is still in its early stages across South and Southeast Asia. And what we see governments and regions is adopting varied responses. In some cases, still pretty tough lockdown responses. In other cases, seeking to manage the hospitalization rates as opposed to manage the case counts. And it continues to be hard to predict how different parts of our operating universe will react. You heard a couple of weeks ago when we early announced our results that one of our Malaysian facilities had been forced to close as we reported an increase in case rates. I'm pleased to say production has now recommenced. The site is operating well again, but further disruption to production clearly remains possible as the Omicron wave has not yet worked its way through most of the countries in which we operate. Logistics delays continue. Lack of container availability remains a problem. And although spot freight rates are no longer rising, overall logistics, I expect, will continue to be a constraint on growth over the next six months. And then, as I also announced a couple of weeks ago, the most recent announcement of a withhold release order by the US Customs and Border Patrol will prevent products from one of our top five suppliers being imported to the US. This is still relatively recent news. We are evaluating alternative options for our customers, but we do expect this to be a negative impact on sales in the second half, and we've considered that in our updated views. Let me now give you some comments on performance by our different geographies. North America first, good organic growth in North America. And in particular, we see success with our surgical business and life science, where we believe we've gained share. Very strong performance in Latin America. And this in particular is a result of us being agile and able to help customers work through what's a dynamic and complex regulatory environment. And we believe our relevance to customers has increased as a result of our ability to help them with those challenges. The EMEA region, perhaps the region most affected relative to the total business by those manufacturing conditions in mechanical, automotive slowdown and so forth, but still achieving respectable growth. A mixed picture in the Indo-Pacific region, strong results in India, as I mentioned, but in other parts, including China, sales were lower year on year against a prior year period, which saw important one-off sales to government agencies and other bodies in response to the pandemic. So that's the overview I wanted to give you on business performance. Now let me hand over to Zubair, who will dive into some more detail on our financial performance.

Thank you, Neil. Since we've already pre-announced results for this financial update, as promised, I'll try and pass out some of the factors considered as temporary, and then Neil will cover how we're thinking about the outlook for the second half and beyond. Now, for the avoidance of doubt, these temporary factors I will be calling out are our management estimates, and I hope they aid you in better understanding of underlying performance rather than them being relied on as IFRS measures. So with that said, beginning with the sales line, we grew 7.5% on an organic basis, and the difference between that number and the reported growth number here at 7.6% is explained by this small acquisition we announced back in January 2021, and that was of the Primus brand and its related assets in the life science and surgical space. Foreign exchange curiously had very little impact to the top line in this half, and movement in our revenue currencies pretty much balanced each other out, so constant currency revenue growth was equivalent to the reported numbers. Now, however, in terms of the gross profit after distribution expenses line, the US dollar did strengthen against our cost currencies, and that's namely the Malaysian Ringgit and Thai Baht. That combined with a weakening Euro drove over $10 million year over year foreign exchange benefit. Now, you can see more details behind that in slide 26 in the appendix to this release. Offsetting this foreign exchange favorability in the gross profit numbers with the factors I'm enumerating here on the right of the slide, we've already explained the largest driver of the 860 basis point G paid compression was the drag of selling that high costed single use inventory. And I'll share what we consider temporary within that in the next slide when we review the HGVU results. At the same time, I think the government mandated shutdowns of some of our factories, coupled with labor shortages and higher freight costs, added further softness to this G-Paid result. And unfortunately, our joint venture Care Plus wasn't immune to these same challenges. And as you can see, that entity also printed a loss of which our share was $2.7 million in the half. And then the final point I'd say from a gross profit perspective, we wrote down nearly $7 million of inventory, and that was mainly driven by the slowdown of the sales volume, particularly in single use and chemical body protection. Now, clearly with this type of GPA performance, we've been tightly controlling discretionary expense, and that in combination with lower variable employee costs, we have been able to cushion some of the adverse impact at EBIT. Turning to the next slide, Anita, to the HGBU highlights. We remain here very pleased, as Neil said, with the continued momentum in the surgical and life-size business units. And although single use did have softer volumes, you've already heard pricing remained above pre-COVID levels and also the prior comparable period. So after normalizing for the effect of the Primus acquisition, the HGBU sees top-line organic growth at just under 15% in the half. Now in terms of margins, of course, with the benefit of hindsight, the slow reaction in lowering our purchases of single-use products from outsourced suppliers as that demand started to decline faster than we anticipated, led to a higher proportion of inventory costs flushing through the COGS line in the half than otherwise would have been the case. And the temporary impact from this, I'm estimating diluted margins by about $20 million. I also call out here about $5 million of adverse factory costs driven by the shutdowns we mentioned earlier. And offsetting these items were lower SG&A costs, but that wasn't enough to prevent a depressed EBIT of just under $64 million. and a margin of 10.1%. Now, clearly, our goal is to get these margins lifted back to what we're used to seeing in this business unit and with an enhanced mix of advanced protection products in single use and a higher weighting towards surgical and life sciences. In terms of the industrial business unit, next slide, please. Here, the narrative is quite a little bit simpler. Strong organic growth at just over 3% in mechanical, offset by negative 11% in chemical is driving that overall decline of just under 3% for the IGVU on the top line compared to the prior period. Now, again, in terms of EBIT, I'm calling out $5 million in impact from the factory shutdowns. And on the favorable side, you can read here that we have lower SG&A expense keeping overall EBIT margin points and dollars pretty flat to the prior comparable period. The next slide, please, Anita. This is our customary review of raw material costs. I think through the height of the pandemic, clearly this slide and raw material costs became somewhat dislocated from the pass-through pricing dynamics. But as the single-use space reverts to previous competitiveness, I think this slide becomes much more relevant again. and in this regard we are seeing natural rubber latex costs remain pretty stable perhaps even trending downwards in the second half but nitrile costs remain elevated and premiums quoted market prices are stubbornly persisting the other point of note here is that like many companies around the world we are seeing inflationary pressures up to double digits in some instances against some of our key raw materials such as chemicals and packaging But practice from the pandemic, we have well-versed pricing behaviors in place, which we're executing to offset as much as the headwinds as we can. Now, however, there is always a judgment call to be made with the frequency of these price increases, given the significant distraction this does cause both to our commercial teams on focusing on growth opportunities and also to our customers. Moving through to the cash flow slide, Operating cash flow dilution here you can see of $22 million is driven by the lower earnings, the further working capital investment and the timing of variable employee expenses. Now from a cash conversion perspective, if I normalise for the timing of those short term incentives and the insurance costs, we paid in the half, we will get back to just under 60% of cash conversion. And that's clearly lower than our 90% plus goal. And now despite the lower temporary cash generation, I do remain, we remain confident in the outlook of the business and we've therefore not pulled back any capex investment plans. However, there is complexity. in traveling in COVID times our engineering and operations teams therefore are somewhat delayed sometimes installing this equipment and therefore the cadence of this spend has not always been so predictable and then as always wrapping up with a quick look at the balance sheet on the next slide so even against all that softer backdrop I've just been through the key takeaway here is that we still have a very resilient balance sheet at Ansell And with a net debt to EBITDA ratio of one, it gives us plenty of room for continued reinvestment into the business and clearly other capital deployment options. Of note for this half also, we've recently upsized and extended our syndicated borrowing facility. And then finally, we have very healthy cash balances on hand and no significant upcoming debt maturities. So I'll conclude the financial section there and hand back to Neil for the outlook and Q&A.