Earnings Transcript for ANSLF - Q4 Fiscal Year 2022

Company Representatives: Neil Salmon - Managing Director, Chief Executive Officer Zubair Javeed - Chief Financial Officer Anita Chow - Head of Investor Relations

Anita Chow: Welcome to Ansell’s Financial Year 2022 Results Webcast for the Full Year Ended 30 June 2022. I’m 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 Javeed, our CFO. The materials we will be discussing today have been launched 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, we will – 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 [Operator Instructions]. We will be addressing questions towards the end of the webcast. Thank you. And with that, I will now hand over to Neil Salmon.

Neil Salmon: Thank you, Anita, and thank you to you all for attending today and for your interest in Ansell. Let me begin with a brief summary of the highlights that sum up the just finished, and a couple of points relevant to the about to start. So five key points here with regards to results

Zubair Javeed: 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 house keeping. 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 are down nearly 4%, well 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 U.S. dollar and that accounts for a significant part of the nearly $35 million for 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 were purchased through the peak of the pandemic. We also told you in our H1, call the omicron waver has caused manufacturing shutdowns in our Asian 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% GPADE 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 GPADE margins was lower SG&A expense, and consistent with my commentary in the H1 earnings call and what Neil just mentioned earlier in terms of controlling discretionary expense in our usual disciplined 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 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 spend in R&D in the year. So, closing out this P&L summary, I’ll also note that the joint venture continued to be challenged with those Exam/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. 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 of just under $1.39, clearly disappointing when compared to the record breaking fiscal ‘21 performance, still much higher than the midpoint of our guidance of where consensus was. But on a like-for-like basis, it’s also our second highest financials over 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, Anita. 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 sales 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 is still outpacing supply there. And overall the HGBU 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 propelled 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 it continued inflationary impacts to the raw material purchases and 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 inflationary cost headwinds, and that’s especially in the areas such as packaging or chemicals and yarns. We are offsetting these where we come 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 MBR pricing and those supply 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 Kovai team, well done for that and packaging is now operational there. We’re very proud with that team and for what they are 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 are 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 is 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. By the time I did remind you, in our last call that the cash fundamentals of this business remain absolutely solid and I expect it would be back above the 90% mark in H2. Now, thanks to the focus from our teams and the diligence we had around things like receivables and inventory. We even exceeded our own ambition in this regard, and in fact not only ended H2 with that north of 9%, 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 a 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 pretax basis is 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 U.S. dollars of liquidity available to us, and with that net debt to EBITDA ratio still staying below one, I think we’re going to be well positioned to ride out any macroeconomic or recession reconcerns. By 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.

Neil Salmon: Great! Thanks Zubair. So as I think about our priorities in the near term, which really means the next 12 to 18 months, I organized them under three headings as the next slide shows. So the first is, we’ll continue that long-term focus. Yes, F’23 as we start has also its own uncertainties, but we will not use that as an excuse to divert from our long-term priorities. So continued focus on capacity expansion, on those differentiated styles, continued investments behind our digital comment strategy, and this opens up significant new areas of growth in parts of the market that Ansell hasn’t been strong in before, and we’re seeing early and very encouraging signs, but still from a small base. Also, opportunities to drive productivity as well in this area. ESG, our leadership position is both the right thing to do. It’s essential that all companies do this. It’s also clear to me that there’s a big differentiation potential here too. Now we’re doing things the right way. We’re not into green-washing or dubious marketing claims, and that means it's taken us – it's taking us a while to get really through the fundamentals here, and be able to position to customers. We can tell you how your carbon footprint will change with different PPE solutions. But that's where we're getting to now and we see very strong interest from customers across the globe to the offerings that we’re bringing forward. And then finally, we continue to work on our Connected PPE. We see some good results in the pilot phase, where we have a demonstrable impact on how to address injuries. Now we are focused on commercializing that technology and going from pilot to repeat customer success. In the middle here we continue to remain focused on improving that operational effectiveness that I talked to earlier. Of course, once we have installed capacity, we have to get it running at optimal rates, and we're investing behind new manufacturing approaches that I think will bring us to new heights of efficiency, productivity and yield on our installed base. We're investing significantly behind systems and processes for enhanced supply chain reliability, but putting in a new end-to-end supply chain planning tool using the latest cloud based and digital technology that I think will transform the visibility and effectiveness of our supply chain planning. Continued vigilance as I had mention already on labor rights for as far ahead as I can see, and ensuring that the industry continues to make the progress that I was noting in my remarks earlier. And then finally like all companies we've got work to do, to ensure that our culture thrives in this new hybrid world, and making sure that as we advance our broader diversity equity and inclusion objectives that that gains traction and there’s real meaning to our employees. We’ve had good progress on gender diversity and we’re ahead of our goals there and I want to see it progress on broad initiatives of diversity. But we have to pay attention to short term market trends as well of course. So it's our goal to fully offset the impact of inflation in the next 12 months through a combination of price increases and also some cost reduction initiatives. At this point in time that objective seems eminently achievable. We will be cautious on SG&A expense, which I think is only wise where there is a risk of recession in conditions taking hold, but that will not stop us selectively investing behind those longer term strategies and particularly investing in continued innovation. We have plans to accelerate delivery within operations of our automation objectives. Those initiatives were a little behind the timeline last year, again because of the difficulties of accomplishing those projects in a COVID disrupted world, but we see increased momentum and a lot of great ideas from a global engineering team that are now showing results in practice. And then of course following the announcement I made earlier, we now need to exit our Russian operations in a way that considers the interests of our employees, our customers and also preserve some value for shareholders and that will be a key priority over the next few months. So what does this translate to in terms of the EPS guidance? So we are setting a range here of $1.15 to $1.35. Clearly that’s below the EPS, adjusted EPS that we've just reported for the last year, but the reason for that is those two factors I've already mentioned. So if you go to the third and fourth from the bottom bullets, you can see the foreign currency effect at $0.25 year-on-year and you can see the exit from Russia effect of just under $0.06 year-on-year. So if I take those off, the prior year figure, that gets me to $1.07 in the chart on the right, and so our EPS range requires good organic growth on an adjusted basis against a normalized $1.07 base. How will we achieve that? Well, today we expect the external environment – as we see the external environment is supported for continued good demand conditions across all our SPU’s. We expect continued strong results from Surgical and Life Science, and as I mentioned Mechanical, we’re seeing improved performance in the second half of last year and we expect that to continue and we plan a turnaround in our Chemical and Exam/Single Use performance with regards to volume. We do anticipate a continued normalization of Exam/Single Use pricing, but that will not have the EBIT impact you might expect, because of course we will also no longer have the margin compression that occurred in the first half of last year through selling through that high cost inventory. So lower selling price, but less of that high cost effect and those two should net out, and overall those two factors be EBIT neutral with Exam/Single Use business, and that means GPADE margin should improve as that GPADE profit will stay constant on a lower revenue base with lower pricing. SG&A costs will increase. We do see higher inflation including wage inflation, but we are remaining cautious on managing overall employee numbers as I mentioned earlier. And then a couple of comments on interest and tax. So overall, I think this is an achievable EPS outcome for the business, and I think it will represent good growth on an underlying basis, again compared to the prior year. So now, I'd like to hand it back to Anita, who will give you an update on what's next in terms of stakeholder communication and then we'll go to Q&A.

A - Anita Chow: Thanks Neil. There's been an increased focus from the investment community in relation to sustainability, and as a result in conjunction with our release of our sustainability report on 13 September ’22, we will be hosting a webcast for the community. It will be held on 28 Sep 2022 at 4

Lyanne Harrison: Thank you, Anita. Good morning Neil and Zubair. Can I start with the higher costs inventory? So if I'm looking at your balance sheet, you know obviously inventory levels is lower than what we saw in December, but still elevated. Has all of that higher cost, Single Use Exam inventory cycle through and if so, can you explain you know reasons for higher inventory levels? Is that likely driven by costs or volume?

Zubair Javeed: So, let me here sort of take that Neil. Yeah, so firstly hi Lyanne! In terms of the overall inventory, as I would have said in the H1 earnings call, we were carrying a little bit more inventory than you would have seen as in the past, because there was increased lead times. The overall supply chain, as you know there's a lot of turbulence around the world in just logistics. Getting product from the Far East to places like the U.S. and Europe was difficult. Increased lead times meant higher in-transit times, meant higher inventory. Alongside that we also – the conscious decision to build additional inventory because of the shutdowns that were taking place because of that Omicron wave, and then finally of course there was some higher inventory levels on the Exam/Single Use business, but we – I would say we cycled through a vast proportion of that, as well as revaluing down the cost of that inventory to the pricing we were seeing in the market. There’s a little bit of residual left in terms of that revaluation down. We told you about that in the first half. We could see anywhere between $10 million to $20 million going into the next fiscal year. At this point closing the year, we’ll probably be that – or come right in the middle of the fairway in terms of that further revaluation down, and at this point we’re looking at about $50 million more of the revalued and that’s based – it’s clearly in our guidance reach as well. So hopefully that answers your question on inventory.

Lyanne Harrison: Yes, that does, thank you very much. And then if I could ask on prices, so you know we saw an interesting graph there about Exam/Single Use ASP. Obviously that's come down from the highs that we saw earlier in the pandemic. What's your views on that? Is there more price declines expected in ‘23 and are we likely to get to that ‘20 pre-COVID level?

A - Neil Salmon: Yes. So we need to separate the business into Exam/Single Use on the one side and then all the rest on the other. So this is – for the Exam/Single Use prices as we exited the half, we’re still quite a bit above the pre-COVID levels and you might contrast that to some of the specialist commodity players who are already talking about pricing at pre-COVID levels. And that really talks to our differentiation and the different nature of our customer relationships, which are much less dominated by tendering and prices, the only criteria in decision making. So to some degree the improvement is a mix phenomenon and also supporting what we’ve long said as the differentiation of our product portfolio. But indeed as I said in my guidance comments, we do expect a further step down in Exam/Single Use pricing. Now it's hard to be confident, whether it will land exactly at the pre-COVID level. I suspect not, because overall costs in the industry are increasing at this point and so that will provide a floor under pricing. But clearly there’s quite significant competition in that commodity end, which is not where Ansell plays between the new capacity that's come on in China and then the existing Malaysian producers. So that’s at the bottom end of the market at the sort of clearing price. That’s putting pressure on pricing, but we see it much less for our product categories. Now, for the rest of the business we are increasing prices. We are seeing good receptivity to those price increases and that's why I remain confident that we should be able to fully pass through the inflation effects we see on the rest of our business.

Lyanne Harrison: Great! Thank you very much.

Anita Chow: Thanks Lyanne. Next up we have Dan Hurren from MST Marquee.

Neil Salmon: Hi Dan!

Anita Chow: Dan, please go ahead.

Dan Hurren : I was just wondering, I know you haven't given – sorry, can you hear me?

A - Neil Salmon: We can hear you Dan, go ahead.

Dan Hurren : Great! Thanks very much. Although I know you're not giving any specifics, but I was just wondering, if we took out the adverse inventory of that high – of the adverse impacts rather of that high cost inventory in healthcare from both halves, in broad terms, did we see underlying improvement second half on the first half in that part of the business. I just want to understand your operating conditions and the exit rate I guess.

Neil Salmon: So, that was mainly – the gross profit dollar improvements that I talked about was mainly because we didn't cycle the – we didn't have the impact to buying cost inventory. So if you step back from this, we said some time ago that Exam/Single Use profitability would normalize over a two year period and that's always been part of our strategic projections for the business. What caught us by surprise was only the speed at which it happened and more of the speed of the demand correction than the pricing correction, and that's what created the accelerated decline in margin in the first half. But it's a timing function and so overall what we're getting to is where we’re expected to into F’23. The correction happened more quickly rather than over the two year period that we had assumed previously. So I hope that gives you some directional comments on this in response to your question Dan.

Dan Hurren : I think so. Thank you. Thank you very much.

A - Neil Salmon: Thanks Dan. Next up we have David Low from JP Morgan. David, please go ahead.

David Low : So I’m going to stick with the Exam ones – can you hear me?

A - Neil Salmon: Yeah.

David Low : We’ll start with Exam gloves and just the proportion that's now outsourced versus in-house and where you expect that to go while we're on the topic. I mean am I right to assume that there will be a drag from that pricing differential from your buying price to the selling price, just given prices are still trending down.

A - Neil Salmon: So, let me take the first one. So yeah, we’re 75/25 now, 25 being the insourced piece. Increasingly we see advantage to being the Ansell manufacturer, Ansell carriers weight with our customers and as we talk about options to insource further along the range, so we've always had the TouchNTuff chemical protective range that's unique in the industry. We would only ever make that ourselves, because it's so differentiated. And then in the middle we have the Microflex range. The still has differentiation to emergency response and other markets like that, fentanyl protection and so forth. Those products, we are now looking at options to bring in-house. We’re increasingly relying on our Careplus joint venture as the source to those products. So I think this is a strategy that we’ll continue David. I think I would like to see us get to 50/50 over a period of time. I'm not able to be confident at this stage how quickly we can get there, but if we can do so in a value accretive way, then I know that that will be of great interest to our customers. So yeah, managing the spread between purchase price and selling price is something that we've done pretty well throughout, but you haven't seen that in the financials because of – we were not – the costs that we were reporting were not of the current purchase price, but the purchase price at the time we bought that inventory. So we've actually done a pretty good job of managing that spread and keeping it constant during this whole time period. There may be some compression in that spreads into next year and that's included in our guidance range, but we don't expect it to be significant. For our insourced products and the prices of those went up by much less and have less to come down, but there are cost base is more fixed I think to the underlying raw materials rather than to finished goods, so there will be some margin compression in the insourced products into next year, but also something that we've taken account of and we expect those products to continue to add premium because of the direct shift capability. So I hope that gives you a bit more context of the exact Single Use performance.

David Low : It does. Thanks Neil, but when you say you've managed it well, I thought that was the big issue in the first half that the spread ended up with inventory that was added – that was older and higher priced. To say that you’ve managed it well, am I missing something?

Neil Salmon: No, what we managed – we managed well that the price we are paying current, the current price we are paying on new purchases versus the current selling price in the market, we managed that spread well. But yes, what we didn't manage well was the timing of those purchases and so we bought too much at earlier high costs.

David Low : To my question…

Neil Salmon: Yeah.

David Low : I mean I know it's difficult and I don't mean to have a go at you. Just the question I have is looking into this financial year, do you think because prices are falling that that's a headwind which I presume you would have allowed for in your guide.

Neil Salmon: I think we've done much less, so yes a moderate headwind which is to the $10 million to $20 million that I talked about, but much less because we have a much better line up of purchase orders and purchase order pricing versus demand requirements and managing inventory more effectively, so yes.

David Low : Okay, great. Thank you. I did have one other – perhaps it was a bit – I mean FX is obviously a huge headwind into the guidance. How much of that’s locked in with hedging or how much uncertainty is there around that FX headwind item in the guidance please?

Zubair Javeed: Yes, so David of course I don't have a crystal ball on the rates.

David Low : No.

Zubair Javeed: If you assume current spot rates hold, especially if you see in the appendix to our slides, you’ll see – I’m assuming that Euro being up currently with the U.S. dollar, clearly that’s going to act as a large driver on the revenue line, but at the same time it's going to – as you’re anticipating, it’s going to drive a significant hedge book gain. All-in-all I'm assuming that will see north of $30 million earnings impact when you compare to fiscal ’22 because of that sharp appreciation to the dollar. And then coming down to your question, in terms of guidance, just under 80% of our euro exposure is hedged at this point in the year. So everything else remaining equal, I think it's really that one hedge piece of 20% on the euro exposure that will largely determine where in our EPS guidance we will land in terms so the FX side in terms of it. So I hope that answers your question.

David Low : Yep, that's perfect. Thanks very much.

Anita Chow: Thanks David. Next up we have Sean Laaman from Morgan Stanley. Sean, please go ahead.

Sean Laaman: Good morning Neil, good morning Zubair. I hope your both well. Well maybe, I don't know Neil, just to triple check, just the Exam/Single Use price normalization, its anticipated result and overall sales decline in FY’23 that just relates to that product category right?

A - Neil Salmon: Yes, yeah.

Sean Laaman: Yeah, got it, thank you. And Neil ex that, I mean you have to characterize the organic growth that you see in the business across fiscal ’23, you know granted that you know that is a huge headwind from FX as David pointed out.

Neil Salmon: Yes, so let me go through each SPU. So Surgical and Life Sciences remain at a very strong position relative to market demand and those markets as your aware are not sensitive to an industrial recession, so it continues to be a more functional supply versus demand and our ability to bring that supply on. Now, it's true. In the Surgical market that some competitors are also bringing new supply to market, but we still see – but not at the rate that we think threatens our inability to achieve above target growth rates in Surgical and Life Sciences, so – and those business is well set. Within the industrial business, mechanical, we'll probably see some recession effects, although as we start the year we’re not seeing those currently, a couple of spots of weakness. German demand has been affected by the water levels in the Rhine and a slowdown in the chemical industry there, but overall if we look at mechanical as we being the year that business looks in good shape and is also being boosted by continued successful new products innovation. And then others of course, the energy vertical for example is a growth vertical and that should mitigate against any negative effect from industrial production or mechanical. The chemical has a rebound opportunity because of that supply constraints last year and, as that normalizes the business and covers from the backorders that were created as a result, I expect improved organic growth from chemical. So that leaves Exam/Single Use and also we need and want to get back to volume growth. There is still some congestion in the supply chain ahead of us linked to excess inventory and we believe it's much less now on Ansell products, but still some customers bought stuff that they don't really want. It wasn't really the right policy, but they still have it and they are working in a way. But overall, I see that picture improving and we are returning to more normal demand conditions in key parts of the market, so that needs to continue, and we need to continue against our differentiation strategy and then we'll see Exam/Single Use volume growth also into – through F’23. So yes, hopefully that gives you a bit more color to my confidence on organic growth profile for our business units.

Sean Laaman: Thank you, Neil. I appreciate it. And Zubair, can you just remind us, sort of the balance sheet targets and if anything has changed there?

Zubair Javeed: Yes. No, we continue – as I said, we continue to make sure we maintain that resilient balance sheet. Leverage levels, I’m happy with, the Board’s happy with. That net debt-to-EBITDA ratio, I think we’re comfortable with one turn. We’ve got increased liquidity. Again, it’s good dry powder to invest in opportunities as and when they present themselves. And again, we’re prioritizing internal investments; we’ve got to finish out the India facility. We’ve got to look at increased lines in our other facilities. We’ve got automation ahead of us. So all-in-all, that balance sheet will help us towards those objectives.

Sean Laaman: Thank you, gentlemen. I appreciate your time. That’s all I have.

Neil Salmon: Thanks. Anita, back to you.

Anita Chow: Next up, we have Vanessa Thomson from Jefferies. Vanessa, please go ahead.

Vanessa Thomson : Thank you, Anita, and good morning Neil and Zubair. I wanted to just cover off on that inventory levels, more from the customer perspective. You said that some of them have inventory that they’re still working through. Is that generally true across your customers and are any of them at the point where they are rebuilding stock piles or is that I think just a temporary thing with COVID? Thank you.

Neil Salmon: So it’s no longer generally true, and that’s why I said that certainly some customers have returned to more normal ordering patterns. But in other spots, more in the healthcare space, we still see some congestion, so it’s improving. I expect it to still be a feature that there’ll be some customers who have not returned to normal ordering patents over the next six months, but beyond that I think we’ll be back to more normal demand conditions. So yes, it’s not generally true, but still true in parts in the industry.

Vanessa Thomson : And do you see customers, especially of course in the healthcare space thinking about stock piles or is that something that was just a pandemic kind of thing that was discussed and it moved on from there?

Neil Salmon: Yes, I think it’s unclear where that’s going to land. So, the whole reimagining of supply chain has not progressed as ambitiously as some would have, and yet I think once the dust settles out and once people get back to more normal conditions, it will come back as a strategy. The decision by hospitals in some cases to hold that extra inventory themselves have caused some of these problems, because of course they don’t protect that inventory and so they end up worried about shelf life and so forth. So we’ve consistently advocated different solutions where ourselves or where the distribution channel can adopt a policy that provides greater stock reliability and avoids those write off risks. I think we’ll see greater interest in that once people have worked through the more current issues. So yes, I’d say some of the predicted outcomes post-pandemic have not yet taken place, but I think there’s still time for people to think that through once they’ve worked through the more immediate issues. So I’ll come back to you on that in future results and discussions.

Vanessa Thomson : Thank you. And then just one last question. I just wondered if you could give us some insight into the freight situation at the moment, and if that’s as it was or if there’s still some disruption. Thank you.

Neil Salmon: So we still see longer lead times as Zubair mentioned and that’s a big piece of the reason why we have higher inventory levels than historically. The predictability of freight has improved quite a bit. So our ability to get contained bookings as on the dates and times that we planned as important and our backlog overall has reduced somewhat with regards to container availability. So it’s moving more reliably, more consistently, but still with those longer lead times and still at elevated costs. Now, there’s certainly some in the industry that are predicting that from here, freight costs moved down. I’m not sure that we’ll see that in the next six months, but I would hope that we do see towards the end of our fiscal year. So it does seem as if we’re past the worst on those lengthened and expensive supply chains, but it’s still too early to predict a meaningful return back to pre-COVID conditions in the supply chain.

Vanessa Thomson : Thank you. That was all I had, thanks.

Anita Chow: Thanks Vanessa. Next up we have Gretel Janu from Credit Suisse. Gretel, please go ahead.

Gretel Janu : Thanks, good morning all. So firstly, just to go back to Exam/Single Use, just that $15 million cost headwind to FY’23, is that expected to be completely washed through in the first half or should we consider it to last the whole full year? I’m just trying to think about that guidance and how we should think about phasing between first half and second half.

Zubair Javeed: Yes. So in terms of – we expect the first half will be a wash of that inventory need Gretel, because of the way we’ll cycle that through, and as Neil said, the purchases that we’re doing now from Ansell’s suppliers, we know that margin spread is back to more normal “spreads” that we’ve seen historically. So yes, the first half is where we will notice or wash through all inventory.

Gretel Janu : And so in terms of your other guidance comments that you’ve made, so that’s the only one that will impact first half. Everything else should be felt progressively throughout the full year. Is that how we should think about it?

Zubair Javeed: Yes.

Neil Salmon: Yes, we do always see a stronger second half than first half and we expect that seasonal weighting to be as usual in the next 12 months as well, yes.

Gretel Janu : Great! Understood. And then just to go to the U.S. withhold release order and the issues that you happen to see with YTY, I guess has that been resolved now? Do you have any other comments relating to those issues? Have we seen any other further move from the U.S. customers and Board of patrol looking at any of your other customers here?

Neil Salmon: So YTY themselves remain under WRO. They have submitted extensive documentation to the U.S. CVP and that they believe demonstrates that they are fully in compliance with all the required labor standards, but the CVP is now reviewing that information as I understand it, and we don’t expect that to be a determination in the next few weeks, not sometime until September probably, before there’s any news on that front. What we have done is resourced most of the products that we were previously buying from YTY, and we’re now bringing those products into market. There was a gap of a couple of months or three months in some cases between when we were no longer able to supply YTY products into the U.S. market and when we brought additional new sources into the market, and that affected our second half and was part of – we’ve seen that in the guidance range that we provided back in January, February, so. Now some of that business has gone to other sales, so we have to win it back of course, but that’s what the team is very focused on right now. And credit to them for the speed at which they were able to find alternative sources for those products with our Careplus joint venture playing a very, very big part in our ability to respond so quickly. More broadly no, we’ve not seen any further action by the CVP in the form of WROs. I think the CVP is pleased with the industry’s actions and overall the formation of the Responsible Glove Alliance. So that’s not based on any direct information that I have, but on comments that I’ve seen. But I’m sure the CVP is continuing, as they should be, to scrutinize the industry. So I certainly wouldn’t go as far as to say the CVP is no longer considering WROs as a measure that may be required in circumstances, and of course it’s our job in Ansell to ensure that we have a supply chain that’s fully compliant and that there’s no risk of WRO action. And our insource, outsource strategy is linked to that as I discussed in response to an earlier question as well.

Gretel Janu : Great, thanks Neil. And then just lately, in terms of the surgical growth, very strong growth in the second half. I guess how confident are you that any market share gains you’ve made here are sustainable?

Neil Salmon: Yes. So we’ve pursued some different approaches this time, that I think have been really effective and I believe will be durable into the future. So the U.S. market for many, many years was one that we were struggling to gain share in, but we’ve adopted very strong co-branding relationships with the leading GPOs, and it’s a highly synergistic relationship, and it’s not – the value they see from the Ansell brand being on their co-brand is very significant, and the value we see from the GPO access that we are, that we achieve, which we didn’t have access to previously, is very significant to the growth. So even when competitors have a stronger [inaudible] position. I think our ability to grow using that strategy will continue and I’m confident that we will be able to maintain the share gains. And then I would say more generally, Surgical, the sort of very significant shift potential as we continue the journey from natural rubber latex to synthetic. Even in the U.S., for example, I think it was the state of Illinois that just a few weeks ago announced to complete on all natural rubber latex in the health care system in that state. And if that becomes a trend, then we’ll see a further acceleration in the U.S. away from natural rubber latex containing products. In Europe, we’ve had to slow work the conversion to synthetic because of a lack of availability. But we know there is pent-up demand in Europe too, to move in that direction and then as I said, it’s also going to become an increasing trend in emerging markets. And as you’re aware, while the lower end of natural rubber latex surgical gloves is less differentiated, still there’s only a handful of producers who can make the synthetic products to the very demanding quality standards that are required by surgeons worldwide. So, we think the Surgical business is set up for long-term success and that’s why we’re pursuing our Indian investment as fast as we can to bring additional capacity to the market. I would also say that that Indian manufacturing facility is going to be one of the cleanest glove manufacturing facilities in the world with regards to its environmental footprint. So it will be 100% renewable energy, and it will have minimal water demand on the surrounding area. So it will have a very strong sustainability differentiation as well, and we think that will be of interest to our customers.

Gretel Janu : Thank you very much. That’s all I had.

Neil Salmon: Anita, back to you. Not sure, Anita are you still on the line?

Operator: Your next question comes from the line of John Deakin-Bell with Citi.

John Deakin-Bell: My question is more about the margin, and first of all, just in the current year going through the annual report, the STI not achieved and obviously a big difference. You had this $50 million decline in wages and salaries. Can you just confirm that that’s mostly from these STIs and its versus budget I’m assuming? So given that the budget or the forecast, the guidance in FY’23 is lowered, should we assume that wages and salaries line gets back closer towards where it was in 2021?

Zubair Javeed: Yes. So overall John, the number you quote includes obviously other costs in there. So it’s not entirely the STI plus the LTI. There is a large proportion of that, and of course in our F’23 guidance we then have to rebuild some of those incentive costs, which is included in the guidance range we’ve given you. But it’s not that $50 million quantum, but it’s obviously a large majority of it.

Neil Salmon: Just to add one thing, the F21 achievement of course was significantly above target to then to swing to a F’22 achievement, that was very low versus target.

John Deakin-Bell: Right, understand. So it was somewhere in the middle. It was the more normal year, and then in just getting back to your comments Zubair earlier about EBIT margins, which is really what we’re all trying to work out in two or three years’ time and all this craziness disappears, where is that going to land? If I look at FY’19, your revenue was $1.5 billion, and the EBIT margin 13.5%. I mean what are the limiting factors from – you know obviously going forward your revenue is going to be quite a bit higher than where it was in FY’19, even when it then gets back to normal. What are the limiting factors in getting that margin back to that, given that you’re talking about, you think you can pass on price increases from inflation in the ex-exam gloves, etc. I mean I’m trying to understand why you wouldn’t get back to that margin.

Zubair Javeed: Yes, so in terms of – it’s a good question, John. In terms of – I look at it this way. How do we get back to that margin, and then yes indeed, what limits us? How do we get back to that margin? We make use of the capacity we’re building in the specialty areas like Surgical and Life Sciences in the higher-margin internalized differentiated Exam/Single Use products. All of those should help us as we ramp the volumes back up, help us with margin, because the mix is just so much better as you know in those higher priced environments. Now, what limits that is of course we don’t know where inflation is heading. At the moment we’re passing through most of that inflation, but we don’t know where it’s heading. We don’t know where FX is heading in two, three years’ time. But of course again we’re building that as much as we can into pricing assumptions and then we don’t know where our leverage will land in terms of the volumes we pass through. But at this point in time and like I said in my remarks, I don’t see why we wouldn’t get back to the levels we’ve seen in the past. I don’t see any reason why we wouldn’t. Neil, I don’t know if you want to add some more color to that at this point. Again two, three years is a long time. We’re not going to predict that far out on this call. But Neil, would you want to add any other color to that?

Neil Salmon: I think it’s a good summary. And John as you say, we’ll land with higher revenue than prior period. And although that revenue growth has come as I showed on that slide from the more differentiated businesses, so the mix trends are favorable to the margin story. The one piece, the one challenge that I would add to Zubair’s list that we have to get right is our operational productivity. So there’s a series of inflationary challenges to manufacturing in Asia right now from labor rights through to energy costs and then the cost of the supply chain as well. So I think some of those will start to reduce, but fundamentally, we have to get the productivity journey right and we have to get our automation investments building momentum, but that’s also what I’m confident in given the success that we’ve seen recently. So that will be the other piece that we need to get right in your formula, John. And then yes, absolutely, we should be getting back to those margin levels in the future.

John Deakin-Bell: Yes, because all of those things you talk about, they are industry wise. So if everyone faces them, then the margins for the whole industry will just permanently be lower, but as you say, assuming everyone can pass prices on, then it would make sense that you can get back to the way you were.

Neil Salmon: Yes. And over a long, long period of time, we’ve seen the industry has always been able to do that in both the Exam/Single Use space, and also in the products that we are more focused on, yes.

John Deakin-Bell: Yeah, okay. Thanks very much.

Operator: Thank you. And our next question comes from the line of Andrew Paine with CLSA.

Neil Salmon: Hi Andrew!

Andrew Paine : Hello! Can you hear me?

Neil Salmon: Yes, we can.

Andrew Paine : Yeah, hi! Just looking at some of your commentary on the Surgical industry capacity, you expect it to recover in FY‘23. I’m not sure if you covered this before, but can you just give a bit more color on who these competitors are and whether they are coming back online or is this adding new capacity to the system?

Neil Salmon: Yes. So there are four big players, particularly in the Synthetic Surgical space haven’t changed. Cardinal is the market leader in the U.S., Monica has strong positions in a couple of markets, but much less of a global presence versus Ansell, and then Medline also has an important role to play and the four of us, between us have around 80% of surgical market share. So with surgical demand being so strong, of course it’s no surprise that Cardinal and Monica are also adding capacity. As we project this out over several years, we see the continued demand for synthetics being met by the capacity that we’re bringing on, and others are bringing on. And as I mentioned also, there are other aspects of our differentiation with regards to go-to-market that we think also put us in a good place going forward. So we were the only ones adding capacity for a while and the consistency of our strategic focus on surgical has really borne dividends, and remember, that’s been the key way we’ve played this pandemic all throughout. It does not lose sight of the long-term fundamentals, not chase after temporarily high gains on nonstrategic products, but instead stick to the strategies that we had already set out prior to COVID-19 coming on, and that’s been very successful, and that’s something that we will continue to do. So some more normal competitive supply situation reemerging, but still plenty of opportunity for our Surgical business to continue growing.

Andrew Paine : Yes. And just – so just thinking about obviously the capacity coming on for Exam/Single Use, and I know it’s quite different in the manufacturing process, but is there any risk that capacity comes online there and demand falls, and they start to look to those lines like Surgical? I know a few other relation manufacturers do it in very small volumes, and don’t indicate that they want to increase in that area. But do you see that as a risk going forward or do you think you can kind of hold it to the current players in the market?

Neil Salmon: I believe so. I see no significant signs of a major step into the more differentiated surgical lines by new entrants and there’s a whole series, there’s a whole set of constraints. Sterilization, capacity and availability is highly limited. The product technology is not widely available. The quality standards are very high, and then access to market and brand reputation were also key to success, particularly in mature markets. So it’s a very different piece to Exam/Single Use. And remember, all the capacity in Exam/Single Use has come in at the very bottom end of the products that are really sold on price and price alone. And that’s just not the case for any of the surgical portfolio, certainly not for the differentiated synthetic range. And then the final point is these volumes are small in comparison to the very large volumes available in commodity Exam/Single Use. So it’s never going to be a sufficient offset to someone who is not happy about the performance of the Exam/Single Use commodity business. So yes, I mean I’ve answered that question many, many times over the last few years and have been able to give the same answer pretty much every time, because we haven’t seen that shift that some have long predicted. It still to me sounds good and happening currently.

Andrew Paine : That’s great. That’s all I had. Thanks.

Anita Chow : Okay. Thanks, Andrew. So that’s all with the telephone Q&A. So we’ll switch over to the webcast questions. Next up, we have David Bailey from Macquarie. Can you talk to the composition of finished goods inventory balance? Why does this sit above historical levels and is there a risk of inventory write-down based on Exam/Single Use dynamics?

Zubair Javeed: Yes Anita, I think I gave that answer earlier, and it was in relation to the long lead times. It was in relation to our intentional decision to increase inventory as a result of COVID shutdowns and again, wanting to bounce back with good inventory levels in the segments we expect to have high service levels in, and then obviously there is that Exam/Single Use pricing that we have to work through. As I said earlier, we’ve worked through mostly the expensive, highly costed inventory repurchase. There’s a residual balance left, and as I said to Gretel there, I think earlier we will have in the first half of work through most of that, is the expected cadence.

Anita Chow : Thanks, Zubair. Another question from David. Can you expand on the drivers of expectations for GPADE margin improvement as well as HGBU?

Zubair Javeed: [Cross Talk] Go ahead, Neil. Go ahead.

Neil Salmon: So, I think we’ve covered the GPADE aspects for Exam/Single Use. So, I think Dave’s asking for the rest. So for Industrial, the lower second half EBIT margin was, because although we did put price through successfully in January, with the benefit of hindsight, it wasn’t sufficient to cover the inflation that we in the end saw come through in the half. So a timing lag and we’ve long said to you that we will generally experience a timing lag in an inflationary environment. But with the price increases that are going through now, I expect that to catch up and that’s the reason for overall industrial margins improving, and then the Chemical business suffered from a significant additional manufacturing cost linked to the COVID-related constraints, and so as that improves and works through and volumes normalize in Chemical, then we should see improved margins in that business for that reason as well. On the HGBU side, it’s for Surgical and Life Science, so also ability to pass on price, but also generally, those businesses being high mix, so high margin. So as those businesses grow at a higher rate than the average, then you have a mix benefit. So those are the other factors that go into our view on GPADE margin going forward. Would you add anything, Zubair?

Zubair Javeed: No, I think that was comprehensive, Neil. Have we lost Anita again? I think we’ve lot Anita again.

Neil Salmon: So I see the web questions, so let’s go to Saul. So a good question from Saul on splitting the Russia effect by GBU. So I’m going to have to try this one, but just to clarify what we’ve reported, the F’22 adjusted, that number between adjusted EPS and statutory is the one time exit costs. It doesn’t include the business trading in the last year. So the $9 million EBIT, 5.8¢ EPS was in the prior year adjusted EBIT number, the 138.6¢, but we will not enjoy those earnings in F’23. You asked for the split by GBU, so I don’t have that, but I think it’s going to be approximately two-thirds Industrial, one-third healthcare, but we’ll try to get that more accurately and follow up if it’s significantly different to that. But that’s about the sales mix and I would expect the EBIT mix to be some of that. Zubair, did you have a more accurate number on that?

Zubair Javeed: No, I think that’s a good assumption.

Neil Salmon: Any last question? It seems on – well David, actually no, I think we’ve covered that on GPADE expectations. So it looks like we’ve covered all the online questions as well. If we still lost Anita, then perhaps I’ll conclude with some remarks and then we’ll conclude the webcast. So overall, clearly although I’m happy that we delivered on our revised earnings guidance, overall it was not a triumphant year with regards to financial results for the business with the decline year-over-year and the miss versus the guidance range that we set at the beginning of the year. But I think if you look underneath the financial results and you look at the accomplishments that we’ve made against our strategic priorities, building out our digital commerce strategy, continued focus on investment behind differentiated products, the innovation journey that we’re on and the potential that our sustainability commitment provides, I believe we’ll look back on F’22 as laying very important foundations for our long-term success, and that’s what we’re focused on as a team. Huge credit to my Ansell colleagues worldwide for the resilience they’ve shown. It’s been a very, very challenging year in which a number of factors have come at us unexpectedly from various different corners of the world, and in every case the team has handled them adeptly, keeping employees safe, keeping our customers supplied and informed, and I’m hugely grateful to the resilience that our team has shown. So as we move forward into F’23, we’ll stay focused on those long-term strategic drivers, and I believe the business is in great shape to weather whatever uncertainties F’23 brings. And of course, that means for you our shareholders, that you should see long term value creation from here and that’s my commitment and objective for you as the CEO of Ansell. So, thank you for your time and interest and the questions today. We look forward to further opportunities to catch up over the next six months.