Ansell Limited

Welcome to Ansell's Financial Year 2022 results webcast for the full year ended 30th of June, 2022. I am Anita Chow, Head of Investor Relations at Ansell. Joining us on the webcast today, we have Neil Salmon, our Managing Director and CEO, and Zubair Javed, our CFO. The materials we will be discussing today have been lodged with the Australian Stock Exchange and can also be found in the investor relations section of our website. Before we start, I have two additional housekeeping points. Firstly, if you could take a minute to read the disclaimer on slide two. And secondly, there will be the opportunity to ask questions You can either type them on the webcast in the Q&A box under the video window, or for those on the telephone line, please press star 11. We will be addressing questions towards the end of the webcast. Thank you, and with that, I will hand over to Neil Salmon.

Thank you, Anita, and thank you to you all for attending today and for your interest in ANZSO. Let me begin with a brief summary of the highlights that sum up the year just finished and a couple of points relevant to the year about to start. So five key points here with regards to results. So firstly, after having downgraded our expectations for the year in January, I'm pleased to say that subsequently we delivered on every aspect of our revised guidance over the second half of the year with a significantly improved second half performance on the first half. One notable accomplishment was improved cash conversion. We achieved 90% overall for the year, which is a significant improvement on the first half figure and also on the prior year, 61%. A key feature for the improved second half was improved margins in the healthcare global business unit. We saw continued very strong results from surgical and life science, and the exam and single use business showed signs of stabilizing. Two lower points that are relevant to our F23 as much as the prior year. So we have made a decision to exit our Russian commercial and manufacturing operations. I'll cover that in a little more detail in a moment. Accordingly, we have incurred a one-time charge in our prior year results, and we will also lose the sales and profitability from that business going forward. And then I also wanted to draw your attention to the FX headwind. You'll have noted that from significant movements that we've seen in rates and generally a strengthening of the US dollar against our other revenue currencies. That's a big headwind into F23, but if you strip out FX and Russia FX, we do expect underlying earnings to show good growth in F23. And then three points in relation to our ESG objectives, which I'll cover in more detail coming up. Good safety results. You will have read we're now committed to innate zero ambition, which we think is fundamental to our future and our position in our industry. And then also we do see that the industry is making good progress on social compliance, and I'll talk to that in a moment. But before I get to those points, let me cover Russia in a little more detail. And this is why we're showing both statutory earnings and adjusted earnings. We recorded a charge in the half related to asset impairment and business restructuring associated with a complete exit of our commercial and manufacturing operations. There's a number of reasons that have gone into this decision. It's one that we take with great regret, having had a successful business in Russia for 30 years or more, a very strong employee team there, very strong customer relationships. But after careful consideration, we've concluded that it's just not viable to continue in operation for Ansell in Russia, and therefore we are pursuing now an exit of this business. The business earned a $9 million EBIT in fiscal 22, and we don't expect any earnings from the business in fiscal 23. So now let me cover those ESG objectives before I then spend a little bit longer on our financial results in the last year. So very good outcome on safety. Everything about Ansell begins with safety. Our mission is to keep the wearers of our products safe. Also, of course, the workers who produce and all Ansell employees safe in the production of those products. We see here a good reduction in both lost time injuries and medical treatment injuries. In fact, our MTA rate is the lowest in many years, perhaps the lowest ever. And as you know, that's from a base that is already one of the best in the manufacturing sector. But perhaps the statistic I'm most pleased about here is the improvement in leading indicators. And we've seen very strong employee response to our efforts around training and awareness to get observations and reporting of unsafe conditions. In total, over 10,000 observations were made in the last 12 months by our employees. on aspects of safety that needed attention. And that's up 50% on the prior year and a great sign of a safety culture taking root and I would hope leading to further improvements in safety outcomes in future years. Turning now to labour rights. A key priority for us, and we have stepped up our area of actions and focus on this within the last 12 months. I'll summarise a few points on the left of this slide here. So we further enhanced Ansell's governance processes around labour rights, establishing a formal labour rights committee that is the decision-making body on these. We've continued to advance our audit program, but also look at ways to strengthen the issues that audits can uncover and ensure we're getting broader coverage of the industry. Labour rights has been a key focus of all top-to-top engagement, including meetings I've held with suppliers, and I'm encouraged with the focus and commitment that I see in my meetings with key suppliers. We announced a year ago that we were launching a formal supplier management framework, and that's achieved a number of steps forward, including, as we note here, significant training to our suppliers on our code of conduct and our expectations of them. And then finally, as you're aware, the Responsible Globe Alliance was launched a few months ago, and this we think is essential because no one company can solve this issue by themselves. It requires industry collaboration, industry standards, common benchmarks, and that's what the Responsible Globe Alliance brings. What are we seeing in terms of outcomes? Well, continued intensive audit program has generally showed good progress in closing out non-conformances from previous audits, but certainly there are still improvements that need to be made. And we're very focused on achieving those with our suppliers. We also acknowledge that audits are only a snapshot, they're only a point-in-time measure, and so having other mechanisms in place to get a more holistic picture of activities at suppliers is key, and that's one of the areas of focus for the Responsible Global Alliance. In my view, we are seeing improvements in labour standards, particularly over the last 12 months. The issue of recruitment fees is largely addressed now. We see compliance to overtime and rest day regulations, and we see significant improvement in the living conditions of workers, particularly in Malaysia and the hostile conditions they live in. So progress, but this is an area of continued vigilance and certainly no reason for complacency and will remain as committed to this area over the next 12 months as we have been in the last 12 months. Turning now to the environmental aspect of ESG, and hopefully you saw our announcement on the next slide with regards to our net zero ambition. Can we advance the slide, please, Anita? So we've committed to net zero with regards to the carbon emissions of our own operations, otherwise known as scope one and scope two emissions. And we're doing this the right way, the hard way, which means actually reducing our emissions and only depending on offsets for a very small residual up to 10% of our emissions. So our goal is to reduce emissions 42% by 2030, 90% by 2040 with that small piece of offsets getting us to net zero. We would like to make a Scope 3 commitment too, but we don't believe in making one until we're clearer that we've got an aligned supply chain. That means customers and suppliers on the journey with us and that we understand a plan with regards to the full end-to-end impact necessary for a commitment to Scope 3. We've announced new commitments around reducing our use of water. We signed up to the green electricity tariff in Malaysia. Our plants have made significant progress against their zero waste to landfill objective and we're ahead of target on that one. And overall, it was great to see EcoVadis award us the silver medal. And that was some months ago. So before this most recent news was in the public domain as recognition of our standing in the industry and our leadership position. And then finally, I'm pleased to say that we're now fully in compliance with the recommendations of the task force on climate related financial disclosure, as you will see in the annual report that we've released today. So now let me go on to our financial results and business results. This slide summarizes the five things that we said in January and February when setting out our revised guidance, and that we said would be key to delivering the required improved second half necessary to hit that new guidance range. And I'm pleased to say that we delivered on every one of these. So sales were stronger in the second half, and encouragingly, it was particularly the more differentiated product lines that saw the strongest sales growth improvement. We did expect exam single use prices to continue declining, and they did pretty much in line with our expectations. But in the third point here, we said that we would still see an improvement in the total gross profit dollars earned in that SVU as the first half impact of selling through higher cost inventory would be much more muted in the second half. And that's how it panned out. And so even on lower pricing, total profit dollars improved for exam and single use. At the time of our half-year results, we were experiencing another round of COVID-enforced manufacturing shutdowns. Fortunately, that was in fact the end of it, and we saw no further required shutdowns in manufacturing. So the cost impact to those was much reduced in the second half. However, the issue of constrained labour and that impacting our ability to produce at full rates did continue throughout the second six months of the fiscal year. And then finally, as I noted already, very significant improvement in cash performance, and that's come through intense focus on working capital, improvement in inventory, and improvement in accounts receivable as well. So all of that delivering the adjusted EPS if I exclude the Russian impact of 138.6 cents, which is just above the midpoint of our revised guidance range. The next slide gives you the full P&L, and I won't present it in detail. It's more for your reference, and all these points we will cover on other slides. But I did pull out the first half and second half performance here so that you can see adjusted EPS going from 61 cents to 78 cents in the second half, and there also you can see the improved cash conversion in the second half. So now let me walk through the P&L in a bit more detail in subsequent slides. If I begin with the performance of our strategic business units on this page, and here I'm showing both the year-over-year performance, but also the three-year performance. With the significant increased demand related to COVID-19 protection in fiscal 21, the normalization of demand and pricing in F22, I think it's particularly important to look through those two years to see a longer-term trend, and that's why we're showing it here. So let me begin with exam single use. So yes, that business was down year over year, primarily as a result of lower volumes. Prices were higher in the first half on half and then lower in the second half on half. But encouragingly, through that period of turbulence, particularly in the mid and less differentiated products within the range, we saw our most differentiated products, those that we manufacture in-house, continuing to increase in volume. So 15% growth in insourced products is, I think, a great result in challenging market conditions. And it was on the more commoditized styles that we saw the greatest declines, as you would expect given results reported by those producers who specialize in that product range. For Ansell, as you know, it's a very small part of what we do. But then if you look at exam single use over three years and you see a 15% CAGR, so yes, that still includes some pricing benefit, which we expect to normalize, but also a significantly improved mix profile for the business. And then those in-source products now representing 25% of the business, up from just below 20% three years ago. Great result for surgical, 17% growth overall for the year, and a substantial improvement in the second half on the first half. We said at the time of the first half result that it was only supply that constrained our growth. And as we got healthier with regards to supply, then the business results improved, but we were still constrained by supply. And surgical still is a question of bringing as much new capacity to the market as quickly as we can. uh to tap into the growth potential that remains in that business and then the three-year growth rate also great for surgical at 11 and that's also a business that's seeing improved mix as there's a continued trend away from powdered nrl and then nrl more generally to the more premium synthetic styles particularly in mature markets but also in starting to be the case in developing markets too The life science business is another business that was constrained by supply, a more significant constraint for that business than surgical. And that's the only reason that it didn't grow well into the double digits. So 8% growth still creditable would have been much more if we had been able to bring more supply on. And there is additional capacity coming on in the next 12 months. But a 16% growth rate over three years, again, a great result for that business. Turning to mechanical now, and overall, I think 3.7% is a creditable result for mechanical. And we have to remember that the business or the vertical that drove growth during the pandemic period, particularly logistics and warehousing in support of e-commerce, that went into a negative cycle as there was some inventory destocking there and generally demand normalized from warehousing linked to e-commerce. But offsetting that was growth in other product categories. Cut protection did very well. We saw improved results by our impact range supporting energy and overall mechanical a good result in the year and overall a 2% growth rate over three years. And that's through quite a challenging end market demand environment for mechanical for major verticals like automotive and the like. Chemical down 12%. So chemical like exam single use is suffering from the comparison to prior period demand for COVID protection. Chemical also supply constrained, perhaps the most supply constrained relative to the other SBUs. And so it was not able to grow as much as the market potential, the high end chemical lines and other particularly hand protection to offset that chemical growth. But note, chemical also achieved a creditable 2.5% growth rate over three years, even considering this last supply chain constrained year. So overall, a pretty satisfactory set of results and some very good results by SPU. So let me comment now on our progress more generally on our strategic priorities. And I think it's certainly tempting for a business experiencing a number of external challenges during the year to lose focus on the essence of strategy. But I'm pleased to say we have not done that. We've remained very, very focused on the long-term drivers of our success and continue to advance all these strategies. If I start on the right side of this page, a continued focus on our capacity expansion program, our Indian surgical greenfield facility started its packaging operations in the last few weeks. And next step will be to bring forward the sterilization capability. And then we expect full dipping activity by fiscal 24. So that project on track. Our Thailand investment in those differentiated in-source styles that continue to grow, progressing well also. And then we've continued to invest in capacity in our Care Plus joint venture as well. And that's been key as we have navigated through the supply chain shocks caused by WRO activity and other items. On the left, we continued to invest in R&D. Overall, it was a cautious year with regards to SG&A. There were a number of things that we opted to do more slowly or not as full as we otherwise would have liked in response to external conditions, but R&D we continued to invest in. And what I think is particularly exciting in the R&D world right now is the number of products that we're bringing forward that have a meaningful sustainability benefit. And we're seeing great interest from our customers in these ranges. The two here are the two first to be launched, but we have a very interesting pipeline coming of products that are markedly different from their carbon impact, as well as other areas of differentiation. And then in the middle is perhaps the most important work, improving our core business processes. Frankly, these have not been at the standard required to fully deliver on our strategic potential in the past, and I'm determined to get them to the point where they are a net add to growth rather than a barrier to growth. Our commercial digital transformation journey is progressing very well. We've made significant step forwards in our e-commerce capability and our ability to interface with customers' digital commerce strategies. We've overhauled our supply chain planning processes to ensure greater focus, better data, clearer decision making and so forth. And then we've also continued our journey of upgrading what in some cases is very outdated ERP technology to the very latest cloud-based ERP. And four systems went live and all perfectly without a single day's interruption to normal operations. So substantial work completed on improving business processes that's very important to the future. Turning now to emerging markets, this continues to be an area of focus for us and another year of great results across many emerging markets. You can see the map of green and many impressive double digits results, particularly in Latin America, also encouraging growth in India. The two not green are Russia, where already during the half, we started to stop. We exited some product lines earlier and we did not take new orders on other product lines. And that's the reason that Russia sales declined. China down, but that's primarily because China had the the biggest COVID-19 related demand in the prior year. And if you strip out that factor, even with the zero COVID policy impacting China, nevertheless, we saw growth across many of our SPUs in China. So the picture in China more positive than this slide would suggest. Then finally, I wanted to give you an update on Sri Lanka before I hand over to Zaver to take you more in depth through our financial results. So the first thing to say is clearly a very, very challenging time over the last six months in Sri Lanka as the country has battled a political and economic crisis. But our teams have done an absolutely outstanding job. They have not missed a beat with regards to achieving their operational goals. In fact, they've been setting new records with regards to output and with higher than usual yields as a result of investments we're making in advanced manufacturing methodologies and technologies. So, of course, we have a responsibility to help our teams there. So we've taken a number of steps during the year, providing additional financial support and non-financial support to ensure that people can afford the basic essentials in a period of extreme inflation. And that's been very well received by our employees. And I am encouraged that today things seem to be improving somewhat. So availability of fuel, consistent availability of power, those basic essentials of life are becoming a little easier. And I myself am looking forward to visiting Sri Lanka in the next couple of weeks and catching up with our team there. So overall, very limited disruption to our operations and that's how we expect things to continue and a great credit to our teams for achieving that in very difficult circumstances. So now let me hand over to Zubair and he'll give you further details on financial results.

Thanks, Neil. And hello to everybody on the call and thanks for taking the time to listen in. Now Neil has already gone through the housekeeping as it relates to that statutory to adjusted earnings. And so I'll just begin straight with the profit and loss summary on an adjusted basis, excluding those Russia related costs. So beginning with the sales line on a reported basis, we're down nearly 4%, but normalizing for the unfavorable foreign exchange and that small Primus asset purchase, organic growth was down 2.2%. The largest decline in terms of currency, as Neil mentioned earlier, was the Euro softening against the US dollar, and that accounts for a significant part of the nearly $35 million a year over year unfavorable currency impact to that revenue line. Now, you can read more about all of this overall currency in the appendix to the investor slides. or to the investor materials. And Neil's again already shared some of the key drivers of the sales line. So I'll move straight to gross profit after distribution expenses. I think by now it's well understood margins were significantly hurt by the sell through of that high priced exam single use inventory that would purchase through the peak of the pandemic. We also told you in our H1 call, the Omicron wave had caused manufacturing shutdowns in our Asia facilities. And as a result of that, we were wearing higher than usual operating expense, all adding to increased cost of sales. And then lastly, like many companies around the world, we've absorbed higher distribution costs, up 20% on a constant currency basis versus fiscal 21. Now, of course, this 29% G paid margin here, we closed the year with, is clearly a lot lower than our historical run rates and what we would target to get back to. Offsetting that decline in G-Paid margins was lower SG&A expense, and consistent with my commentary in the H1 earnings control call and what Neil just mentioned earlier in terms of controlling discretionary expense in our usual discipline manner. But let's be clear that most of that reduction was simply driven by lower variable employee incentivization costs. And a downgrade in earnings didn't help that, of course. And although we do have this lens on near-term performance, it doesn't mean we're going to just pull back on investments where we see medium or long-term value creation opportunities. And again, you just heard we've maintained a good rate of spending R&D in the year. So closing out this P&L summary, I'll also note that the joint venture, it continued to be challenged with those exams, single use market conditions, as well as labor shortages in Malaysia, which are easing, but still it printed a full year loss where our share amounted to just over 8 million US dollars. And again, we're targeting a much better financial performance with that entity in the new fiscal year. So all in all EBIT of 245 million, EPS are just under 139 cents, clearly disappointing when compared to the record breaking fiscal 21 performance, still much higher than the midpoint of our guidance or where consensus was. But on a like for like basis, it's also our second highest financials of the last 10 years. And I think it's built on a very solid differentiated platform to work on for the future. So that brings me to the review of the GBU financials. If you can just advance the slide, please, Nita. And so let's start with the healthcare business unit. Again, here, the dominant headline is that exam single use pricing and muted volumes. But we do remain very pleased with the surgical and life sciences momentum. In fact, surgical cells grew nearly 30% in the second half. And again, as Neil said, we did indicate that in the H1 call as capacity came online and as workers came back from the shutdowns. And again, demand still outpacing supply there. And overall, the HEBU closed the year down nearly 40% in margins, again, driven by that sell-through of the high-cost inventory, but in part offset by the SG&A reduction. Now, as conditions continue to normalize in exam single use, I can't see why EBIT margin percentages in this particular global business unit wouldn't get back north of the 14 or 15% or even higher as we've seen previously. Turning to the industrial business unit, again, here we see the impact of comparisons that were influenced by the COVID propel demand. And even though we had nearly 4% growth in mechanical, again, as Neil said, it wasn't enough. to offset the chemical sales reduction in that protective clothing segment, and that led to an overall decline of just under 2%. Now, you couple that with the COVID-driven manufacturing shutdowns in H1, those increased freight costs, and the continued inflationary impacts to the raw material purchases, we've seen a year-over-year decline in EBIT. Moving to the next slide. I'll drill down here on a couple of key points as it relates to our cost environment. Firstly, you can see here we're impacted by sometimes double-digit inflation-recost headwinds, and that's especially in the areas such as packaging or chemicals and yarns. We are offsetting these where we can through pricing. But you can imagine managing that across a very broad supply chain with very long lead times. It does mean sometimes there's that little bit of imprecision. As you saw in the year, we can be left with some residual unfavorable earnings impact. The other notable point on this slide is that the industry norms are returning. I think it's less of a capricious environment when it comes to NBR pricing and those supplier surcharges. with that raw material have now come away. But overall though, both natural rubber latex and those nitrile input costs, they do remain stubbornly higher than pre-pandemic times. The next slide, this is showing our continued CapEx investments. We closed the year at just under $70 million of spend, which was clearly at the lower end of our guidance range. and i've mentioned in our last call deploying that sort of capital it was made difficult because of covid related travel disruptions but there's a lot of credit to our teams engineering teams manufacturing teams for getting up and running those new manufacturing lines for instance in thailand and our other asia facilities we're also very very pleased with the speed Our Greenfield surgical site in India is coming along. Kudos to our Covi team. Well done for that. And packaging is now operational there. We're very proud of that team and for what they're doing there. And as we firm up our ESG ambitions, you'll notice in this slide, we're also directing investment dollars behind things like solar panels, reverse osmosis facilities. And again, that should help with our water usage. Our board of directors, they're firmly encouraging this type of investment. And so I would expect you're going to be hearing more about these types of initiatives going forward. Moving on to the cash performance, probably my favorite slide of the pack here. Given the dilution we had in our working capital, clearly because of those elevated exam single use prices, it wasn't too surprising to see our cash conversion ratio down in the 60% range. in half one but at the time i did remind you in our last call that the cash fundamentals of this business remain absolutely solid and i expected we'd be back above the 90 percent mark in page two now thanks to the focus from our teams and the diligence we had around things like receivables and uh inventory we even exceeded our own ambition in this regard and in fact not only ended H2 with that north of 90%, we ended the full year back to a 90% cash conversion. That's a remarkable achievement, I think, and gives me comfort for the movement going forward. Now, working capital investment is also back to more normal levels, and healthy net receipts clearly enables us to reinvest back into the business, but also leave plenty of room for other capital deployment options. And then lastly, I'll wrap up with a few comments in respect to the balance sheet. If you can advance the slide, please, Anita. I think in these uncertain times, one thing that pleases me very much is the constancy of this strength of this balance sheet and the optionality it continues to provide us with. And you'll see from this slide overall, return on capital employed on a pre-tax basis. It's back to probably historical run rates with just over 13% ROCE there. And on a post-tax basis, 11.3% return on equity for the year. Still way above our cost of capital. Now cash remains well positioned with that increased facility we mentioned in the first half. We have over $630 million of liquidity, that's US dollars of liquidity available to us. And with that net debt to EBDA ratio still staying below one, I think we're going to be well positioned to ride out any macroeconomic or recessionary concerns. But at the same time, I think we can still be very proactive with investment opportunities as and when they present themselves. So I will finish by thanking all my Ansell colleagues. across the globe for their agility and commitment through what was an especially challenging year. And I'm going to hand back to Neil here now for fiscal 23 outlook and final comments.