Ansell Limited

Thank you for standing by and welcome to NCEL Limited FY23 half-year results. All participants are in the listen-only mode. There will be a presentation followed by a question and answer section. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr. Neil Salmon, CEO. Please go ahead.

Thank you and good day to you all. Thank you for joining today and for your interest in Ansell. So I'll start with a business update. We'll then cover financial results with Zubair. Come back to me for some comments on outlook for the rest of this fiscal year and then we'll take questions. So let me start with a business update. Overall, our external environment saw mixed trends between our industrial and healthcare market presence. Generally favorable demand trends for industrial, supported by key verticals such as automotive and energy. In contrast, difficult market conditions for healthcare, where destocking was a prominent feature across most of the verticals that we serve. As many have noted in this earnings season, market conditions remain variable, difficult to predict, not least of which are FX rates, which were unfavorable to us during this period. Within this market environment, let me summarize the key results that we've delivered. We saw strong organic constant currency sales growth in industrial, with a particularly strong result in mechanical. Another half of double digit growth in surgical was pleasing and our consistent and multi-year strategy of growth in emerging markets continued to show dividends in the half year. We anticipated and did indeed see lower sales in exam single use. But we also saw lower sales in life science as this customer destocking effect extended to that vertical too. And as both businesses experienced lower selling prices as planned, as we adjust selling prices to post-COVID norms. Our EBITDA margin improved 120 basis points, the improvement coming in healthcare and that comparison also on an organic constant currency basis. A quick summary of key elements of our strategic progress. Our Greenfield surgical facility in India is progressing well. A few hours ago, we announced that we'd acquired the other 50% in our CarePlus manufacturing JV. And as I'll cover in a moment, we believe that's an important step in enhancing our surgical and exam single-use manufacturing capability. Our recent capacity expansions are performing well, particularly our exam single-use facility in Thailand. And we continue our focus on R&D with a particular emphasis on more sustainable product solutions. I'll cover the financial impacts of those results in a moment, but before I get there, let me say a few words on our sustainability objectives. And of course, and as always, we begin with safety. Last year set a very good benchmark on safety, some of our best results ever. This year I'm pleased to say our lost time injury rate remains at last year's good level and our medical treatment rate has reduced further. And we also see a continued increase in the leading indicators of safety where we report and observe unsafe conditions or acts before they become causes of injury. But I do want to highlight an accident that, while not in these statistics under the OSHA reporting regulations that we follow, was nevertheless a serious accident and one that's led to a number of follow-ups. During transportation back from a work shift to accommodation, 39 workers were injured in a bus accident. They've all made a full recovery. But as with all serious accidents, this has led to a comprehensive review of transportation safety. And we have a program across all our countries in place and improving according to the learnings from that. Moving now to our labor rights objectives. And here again, a half year period in which we've made some important steps forward. We continue to implement our sustainability management framework that we set out in some detail in our sustainability report. We've largely completed wave one, which is the onboarding of our major finished goods suppliers and are progressing with wave two, which encompasses many of our key raw material suppliers. We've also adopted an enhanced internal risk assessment process that guides decision making in the event that we have concerns about whether a supplier is following our code of conduct and is operating in accordance with our key principles. In order to ensure we have effective management of our supplier base, we're in the process of consolidating our spend to fewer suppliers where we have in-depth insights and are confident that they themselves also are leaders in their sustainability performance. Linked to that, it's important that we strengthen our insights across the entire supply chain and we continue to supplement the SMETA audits that have been in place for some time with more in-depth forced labour assessments against the 11 indicators of forced labour as set out by the International Labour Organisation. We are making progress. A key milestone achieved in the half is that all our Malaysian finished goods suppliers have now confirmed that they have completed their recruitment fee reimbursement for currently employed workers. That's to the benefit of more than 30,000 migrant workers across Malaysia. Generally, we see good progress by finished goods suppliers in closing out audit issues, And I'm also encouraged at the level of attendance we've seen by our suppliers in the training sessions that we are conducting, describing our code of conduct, covering our expected labour standards and our broader sustainability objectives. Finally, in this section on progress against environmental goals, and you'll remember a little over six months ago, we made a series of new commitments, including most importantly, that we will be at net zero by 2040 with regards to our own internal operations emissions, otherwise known as scope one and scope two. We are on track to achieve that goal and a couple of highlights here went out 25% of our electricity sourced from renewables. We continue to invest in solar at a number of facilities and we continue to also ensure that we are connecting to the best insights and available information in the world of sustainability with further progress shown on this page. We're also on track against our water withdrawal target and continue to invest in advanced reverse osmosis systems. And finally, effectively all our plants today are now zero waste to landfill. Six have been officially certified as such by Intertek and the other four are in the certification progress. And that means that in the last six months, just 0.5% of waste generated by manufacturing went to landfill. That compares to over 17% just three years ago. Now moving on to financial results. So overall sales lower with the constant currency sales growth in industrial more than offset by lower healthcare sales with FX translation effects and the exit of our Russian operations at the end of last fiscal year contributing additionally to the decline in reported sales. EBIT margin, as I mentioned, improved on an organic constant currency basis. Healthcare margins increased substantially after being negatively affected in the prior period by the sell through of relatively high cost finished goods, exam single use inventory. Industrial margins were lower, but we expect to improve in the second half. Comparing EBIT period on period, And the key factors here are a decline of $5.7 million due to the loss of the contribution from a Russian business in the prior period, and a decline of $13.8 million from unfavorable foreign exchange effects. If I exclude both these factors, then EBIT was broadly unchanged on the prior year, as you can see in the organic constant currency column on this page. The board has declared an interim dividend of just over 20 cents, which is a payout ratio of 40% and consistent with our dividend policy. Turning now and providing you with some more detail on organic growth under our strategic business units. So exam single use down significantly in the half, but important to note that still showing a favorable three year growth trend. Customer destocking was a significant contributor and the long period of destocking in medical, which we anticipated to continue this half, was joined by a greater impact than expected on destocking extending for these products sold through other verticals, in particular industrial distributors of exam and single-use products. Prices were also lower, but this in line with expectations and overall I'm pleased with how we're managing unit margins for this business and they are trending somewhat above our expectations at this point. Looking at the three-year picture and the mix of this business has improved significantly and that is largely driving favorable revenue as we've exited and reduced our presence in the most commoditized and least differentiated products and strengthened our presence in more differentiated higher selling price and higher margin product ranges and that of course also links back to our manufacturing investment strategy. For surgical, another half of double digit growth, and we saw that in all regions, which is particularly satisfying. I would note, though, that we're clear that in the half one, there was some benefit from customer inventory build, particularly in North America, and also recovery of back orders, as we and the industry generally have now restored more normal supply. Over the three-year period, we see both volume growth and continued mix improvement for surgical as the general trend away from powdered and powder-free natural rubber latex to more advanced, higher price and more specialty synthetic alternatives continues and still has a long way to run around the world. A life science business went from a multi-year period of significant growth to a decline in the half. And again, we believe that's primarily a result of destocking, with major distributors reducing inventory levels by many months. This was most pronounced in our EMEA and APAC businesses. Our distributors confirm and our sales team observe that underlying market demand continues to be favorable, although we are clearly not seeing that on Ansell in this period of destocking. Again, looking over the three-year time period, and we see double-digit three-year CAGR, even with the current period being affected by destocking, and we're confident that market fundamentals in this business remain very favourable to long-term growth. Turning to the industrial business units now, And mechanical, a very strong half-year performance, growing at 7.6%. We saw that growth come from all regions and supported by double-digit expansion in emerging markets. Particularly satisfying that the growth came in the areas where we've invested. Our new products are gaining traction and winning business in cut protection. Our recently acquired ringers business was behind a very strong performance in specialty and especially to energy markets, which of course are seeing very strong demand currently. Looking at the three year picture and what we see in mechanical is that the broadening of our vertical exposure there, energy is already mentioned, our presence in warehouse and logistics now give this business more areas to compete and succeed in and reduce its exposure to any one particular element of the economic cycle. Chemical returned to growth in the half, largely through price improvement in hand protection, but we do see improving trends in body protection, another part of our business that is, I believe, towards the end of its post-COVID destocking phase. Over the three-year period, we see growth in both hand and body protection, and these are weighted to our more differentiated high-end chemical portfolio, where we continue to invest in differentiating our go-to-market, including through our chemical guardian safety audit system. A few more details on our growth in emerging markets. And it's particularly satisfying to see emerging markets reach almost 25% in the half, and that's without the contribution of our significant Russian business. An overall organic constant currency growth after excluding currency and Russia from the prior period of 4%. We saw strong results, particularly in both surgical and mechanical portfolios, with both growing over 20%. And yes, in emerging markets, we did see declines in exam single use and life science as everywhere, but these were not enough to offset the surgical and mechanical growth. By region, double digit growth in China, even with all the headlines around the more challenging economic conditions in that country, our teams found ways to continue winning and a particularly strong result for our surgical team in China. Latin America has a multi-year track record of success, grew again by 8%, with good results in Brazil and Mexico especially. And in India, we saw strong growth in surgical, although India did experience lower sales from exam single use. But that mix shift was very favorable to India margins, and the India business overall remains in good shape. On Russia, we've completed the exit of our operations. We are in the process of selling our manufacturing facility. We have reached agreement with a third party on all key terms of a transaction. We're now waiting for the final stages of government approval before that transaction can close. And I will not be able to give any details about that until we have achieved those government approvals. Let me now turn to the recently announced acquisition, full acquisition of our joint venture CarePlus. We announced a few hours ago that we've agreed to acquire the 50% shareholding that we didn't already own in the JV from CarePlus Group for around $9 million. And accordingly, when the transaction closes sometime in March, this will make CarePlus a wholly owned subsidiary of Ansell. I believe that this investment, together with the investment we've made in Thailand in our industrial-grade, touch-and-tough exam single-use, has transformed Ansell's position within the exam single-use market. And now, for exam single-use, as with all our other SBUs, we are primarily a branded innovator, marketer, and manufacturer. And bringing those key qualities together sets us apart from almost everyone else in the industry. Why does it make a difference to manufacture our own products? Well, firstly, in an era of increased scrutiny and lack of tolerance for any issues, it gives us greater control over our single-use exam supply chain. It also gives us additional surgical capacity, and this capacity particularly suited to continued expansion of our emerging market strategy. It also brings us important protection over innovation. The single-use business has largely been focused on supply chain challenges over the last couple of years. Now, as those normalize, we're turning our attention back to innovation. As we bring new products to market, and in particular, develop solutions to the sustainability challenge in this business, we want to be sure that those innovations are exclusive to Ansell. The customers know they can only get those products from us, from no one else. And we also know that by introducing Ansell technology, we can achieve enhanced manufacturing productivity at this facility, but we did not want to do this without full ownership and control. The acquisition will be funded from existing reserves. We expect the P&L impact of the manufacturing entity to be EPS neutral, but the main return from this manufacturing entity comes in the sale of the products, which are already in the Ansell P&L. Closing is expected, as I mentioned, by the end of March. Let me conclude here for the moment. Let me hand it over to Zubair to give you more detail on financial results, and then I'll come back in a moment with some comments on the outlook. Zubair, over to you.

Thank you, Neil. Hello to everybody listening into the call. So I'll begin with a review of our first half profit loss summary, as I always do. And Neil's already covered detail behind sales performance in the half. So let me focus more attention on the other lines of the P&L. Now, you've just heard the foreign exchange movement negatively affected sales by $48 million and EBIT by just under $14 million. The major drivers of this were the double-digit depreciation of the Euro, that hurts revenue, offset by a couple of our cost currencies, namely the Malaysian Ringgit and the Thai Baht, both weakening versus the US dollar. Our hedge book gains in fiscal 23 soften some of the bottom line impact, but that will act as a comparative headwind as we move into fiscal 24. And Neil will cover a bit more about that shortly. Moving to the gross profit after distribution expenses line, here a 450 basis point improvement in organic constant currency terms. is largely driven by that exam single-use rebasing in both price and cost. The unfavorable FX movement Neil's just covered and I've just mentioned also hit cheap paid margins on a reported basis. Now, as we were cycling through that high-cost inventory last year, I did outline even then that the depressed margin percentages were simply a phenomenon of that corresponding G-Paid math on a much higher outsourced product cost. But this should be reversed as pricing and cost normalize back towards pre-pandemic ratios. The G-Paid percentage now, as you can see, it's indeed moved in line with that narrative. Moving forward, I'd expect further normalization, albeit to a lesser extent than the benefit we've just seen or experienced in H1. In terms of GPA dollars, we're down nearly $21 million on a reported basis. And of course, that's explained by that rush exit, the unfavorable foreign exchange, and destocking in both the exam single use and life sciences segments as highlighted earlier. Moving to the SG&A investment in the half. Now, again, not dissimilar to so many companies, I would say, around the world, our prior year SG&A included very little travel expense and other costs related to in-person customer-facing activities. So as travel, et cetera, has picked up, that SG&A as a percentage of sales, it's also risen back towards that 19% to 20% mark that you've seen us historically trend at. Now, at the same time, however, given clearly the uncertain macroeconomic backdrop, we've remained very cautious and disciplined in pacing overall expenses, and at least where they're discretionary in nature. And then lastly of note on this slide, despite a significant increase, I'd say, in the tax rate, and that was driven by Sri Lanka corporation tax increasing from 14% to 30%, Our group effective tax rate benefited from us using up some unbooked tax losses in the half. So we're concluding H1 there with nearly 51 cents EPS, and that's 10% growth in constant currency terms. The healthcare business unit performance is shown here on the next slide, slide 15. Now at the GBU level, you can see the more pronounced effect of that exam pricing normalization. And despite a 22% decline in organic constant currency growth rates, the business unit experienced double digit EBIT growth and nearly 400 basis points improvement in constant currency margins. Again, Niel's covered so much of their sales performance. And so I'll not repeat that commentary. Moving to the industrial business. unit on slide 16. Here we see the reverse situation and despite a strong constant currency sales growth we have a double digit decline in EBIT performance. Now that's explained by the softness in the chemical business unit margins and some temporary difference with our overall price recovery. I did mention in our last earnings call that given that sheer depth of our product ranges and how those products move through our supply chain, we're not always going to perfectly line up price against the cost increases. However, in the second half, I would anticipate that we recover any pricing gap we had from H1. Already in January, for instance, we do see achievement of further price increases and some of those cross pressures diminishing. Now, that should help overall IGBU margins in H2, although that chemical disposable clothing segment does remain highly competitive. Next up is a review of our raw material costs. Slide 18, overall cost of goods sold was about $530 million in the half. And as you'd expect here, the composition of outsource costs is now much lower and more in line with those pre-pandemic percentages. And at the same time, we're also seeing 10 to 20% reductions in natural rubber latex and NBR feedstock costs. However, offsetting those are increased labor costs and energy costs in Sri Lanka and Malaysia, as we highlight here in the slide. I'm also calling out inflationary pressures against other raw materials, such as that chemical yarn packaging costs. So overall, it's a pretty mixed picture in terms of raw material costs. But I would still summarize this as an inflationary cost environment and one in which we must maintain pricing discipline as we move across that second half. Switching to the cash slide, overall, given our usual H1 to H2 skew here, I think satisfied with 65% cash conversion in the half, and we have positive operating cash flow. However, we did invest more in working capital than I would have liked. I'll speak more about that in a moment. But in the second half, I target a much stronger second half in terms of cash conversion, And I'd be pretty disappointed if we couldn't get back towards that 90% conversion we saw last year in fiscal 22. In terms of operating cash here, you can see also we spent $33 million in capex in the half. And I think that's pretty good run rate for the second half as well. We're pleased with how capacity expansions are progressing and my operations colleagues will start to focus attention on more automation and productivity projects as we move into fiscal 24. Turning to the balance sheet, please, next slide. On slide 21, I remained pleased here with low net debt to EBITDA levels, which of course affords us good capital allocation options. However, as I've just mentioned, that working capital and specifically the inventory remains a focus area. In the half, we did intentionally build up some surgical and mechanical safety stocks, but inventory also increased because of those destocking effects Neil mentioned earlier. Now, with long manufacturing lead times and transit times, any major deviation with our demand forecasts can take five or six months to course correct. And so we either wear more inventory investment than we would like, or we have the opposite problem of increased customer back orders. Now, neither situation, of course, is optimal. And so we continue to drive a myriad of internal initiatives to improve the reliability of our forecasting and of our supply chain. And as Neil will shortly comment on, we're cautiously optimistic that we're on the right track for sustained improvements in this regard. And lastly, return on capital employed is lowered because of several factors. Firstly, with that increase in working capital, we've invested in in-house manufacturing capacity, as we've told you in the last few earnings calls. And then, of course, we've invested now in the care plus consolidation or the step up of balances relating to that consolidation. And all of these factors are outpacing our earnings growth. Now, Although Roche is lower for the time being, we are building solid platforms for future revenue and earnings growth. Moving to the last slide here in this section. Here in an environment of sharp and uncertain interest rate movements and those debt markets which we're all reading about are so much more selective than a year ago, I did want to end my section here with a quick review of our funding profile. So in summary, we have nearly $600 million of liquidity available to us at 31st of December. And with our debt profile, I think you'd agree here well balanced from a maturity perspective with largely fixed interest debt. we don't really see significant refinancing risk or indeed our P&L, I would say, is largely protected from sudden heights in interest rates. And so to wrap up, I say this in most of our earnings calls, and I'm pleased to be able to continue saying it. At Ansell, we remain a very strong cash generator. We've got relatively low levels of debt. Clearly, this preserves our optionality when it comes to deploying that capital, and that's whether it's for high-yielding internal investments, M&A, or indeed returning cash to our shareholders via dividends or buybacks. So thank you for taking the time to listen in to the call, and with that, I'll hand back to Neil for guidance, commentary, and then on to Q&A.