Ansell capitalises on surgery waiting lists, squeezing out rivals

Protective clothing maker poised to take bigger share of surgical gloves market, as rivals wilt and hospital queues extend for years.

Ansell protective clothing

Protective clothing maker Ansell is poised to take a greater share of the surgical gloves market and “squeeze out” other manufacturers, predicting demand for its products will continue to remain high even after the COVID-19 pandemic subsides.

Chief executive Magnus Nicolin said many manufacturers had “abandoned” the surgical gloves market to capitalise on more profitable single-use products, while Ansell’s smaller rivals will not be able to keep up with increasing demands from customers.

But with waiting lists for non-elective surgeries to extend for years - with with the UK alone having a record 4.4 million people waiting for routine treatment - Ansell has seized an opportunity and has been expanding its capacity at an “unprecedented” rates.

It is set to launch eight new production lines in coming months after commissioning five new lines in the half year to December 31. This will lead to Ansell more than doubling its in-house capacity of single use gloves and suits, as well as expanding capacity in surgical, multi-purpose, chemical and electrical gloves so it can capitalise on the increased demand.

The capex spree comes as Ansell delivered “record organic sales”, with revenue surging 24.5 per cent to $US937.8m and net profit leaping 61.9 per cent to $US106.5m in the six months to December 31.

“We have picked up a lot of share and squeezed out some competitors - and some of them, frankly, walked away because they could make more money doing single-use gloves, so we had a little bit of freebie there. They abandoned the space, they abandoned the battlefield and we moved in,” Mr Nicolin told The Australian.

“And there have been a number of smaller companies that have been in glove production for a number of years. They are going to have a harder time now because all of a sudden they have got to live up to a higher requirement on labour practices instead of putting their foreign workers in rooms of 20 each - at Ansell we have two per room.

“It’s becoming increasingly demanding to deliver the standard required by most customers - having to do audits and verification of these practices. If you’re a small company without scale, you are going to have a hard time adopting the best practice when it comes to labour and building designs and how it all comes together. That’s why I think a lot of them are going to get knocked out because they won’t be able to survive the squeeze.”

The surgical gloves market is a particularly lucrative opportunity. Mr Nicolin said it was difficult for manufacturers to re-enter that market once they leave.

“Surgical gloves are normally quite sticky. When the surgeon gets used to a certain feel of a certain glove, they don’t want to change, and it’s also a precise requirement set up by the hospital safety committee, so once you are there, you are there.

“It’s going to take a couple of years in most countries to get back to normal with waiting times and so forth. During that time, what we are doing is building new capacity so we can be there.

“We are confident we can secure strong returns on these investments. This is a unique moment in time for all us and we have been tested in many different ways. Our contribution to the world is to get the products quickly and as efficiently as we can, so that we can get through this.”

Ansell CEO and managing director, Magnus Nicolin. Picture: AAP

Mr Nicolin said another big reason for ramping up capital expenditure, which jumped 63.4 per cent to $45.1m in the first half, was distributors and end-customers going directly to overseas manufacturers to source personal protective equipment (PPE) during the pandemic.

“So many of these importers, who are not adding much value at all, are getting sidelined by either big distributors going directly to China or Malaysia or even end customers going direct.

“That’s why we decided to double down in manufacturing. We essentially said we must be an integrated, innovative manufacturer/marketer, because if we are not we will not be left standing when this thing shakes out.”

Ansell shares closed up 1.8 per cent at $39.28.

After lifting its profit outlook last month, Ansell increased its earnings guidance again, saying it expected earnings per share to fall between $US1.60 and $US1.70 this year.

Macquarie analysts said Ansell’s earnings result was in line with their expectation but they remained neutral on Ansell, highlighting the need for more commentary on the sustainability of the surging demand for single-use and exam gloves over the medium term.

“PPE demand is expected to remain elevated for the next 12 months; further supply-demand imbalance is expected to result in higher outsourced supplier/raw material costs, which Ansell will look to pass on to customers,” Macquarie analysts said in a note to investors.

“We are looking for further commentary in relation to considerations for 2H20 and the sustainability of increased single use/exam demand over the medium-longer term.”

Ansell’s healthcare division was the main earnings driver, with overall sales rising 39.2 per cent to $US594.7m. This compares to revenue across its industrial business framing 7 per cent to $US388.1m.

It will pay a dividend of US33.2c a share on March 10 - and increase of 52.6 per cent on last year’s payout. This reflects the company moving to a proportional dividend policy, targeting a payout ratio of 40-50 per cent.

“This approach is expected to better align shareholder benefits with movements in earnings but also provide the ability to support investment in future growth and maintain a strong balance sheet.,” chairman John Bevan said.

“The first half of 2021 financial year continued to be dominated by the impacts of COVID-19, whether it was the need to ensure the safety of our employees, increased demand for enhanced personal protective equipment by end-users or the flow-on effects of lockdowns on the global economy.

“The company was able to successfully navigate through these to deliver record organic sales and constant currency earnings per share growth of 22.9 per cent and 64.7 per cent, respectively.”