Ansell shares plunge as much as 24pc as earnings cut on Covid supply chain disruption

The maker of surgical gloves has cut earnings forecasts amid allegations of forced labour in its supply chain, and a perfect storm of Covid-19 disruptions.

The US Customs and Border Protection authority has issued a withhold release order against a major supplier of exam/single use gloves to Ansell.

More than $560m has been blasted off Ansell’s market value as it scrambles to replace one of its biggest suppliers, YTY Industry Holdings, after US Customs banned the Malaysian vendor’s products over modern slavery allegations

Two days after US Customs halted imports from YTY — which supplies Ansell with examination gloves — citing the use of “forced labour”, Ansell’s new chief executive Neil Salmon slashed earnings guidance by 24 per cent.

Mr Salmon, who replaced Magnus Nicolin last September, said the ban and Ansell also being forced to shut one of its own factories in Malaysia last Thursday to stem a Covid-19 outbreak, tipped the company into the profit downgrade.

Ansell shares dived more than 22 per cent on Monday before recovering some ground to close 14.3 per cent lower at $26.76.

Mr Salmon also revealed a perfect storm of Covid disruptions — including chip shortages, manufacturing shutdowns, higher freight and labour costs, and longer delivery times — had battered its operations in the first half of the year, crunching margins. Meanwhile, demand for Ansell’s products has slowed faster than expected.

The downgrade came just two weeks before Ansell is due to deliver its earnings result for the six months to December 31.

Mr Salmon said YTY was one of five biggest suppliers and Ansell had suspended its order with the company. But warned Ansell has limited ability to replace it with alternative sources.

“We have suspended our order with YTY Holdings and are developing plans to counter this disruption in the North America market,” he said.

“This will have a bigger impact on the total US market and not just Ansell.”

The suspension comes as pressure is mounting on Malaysian manufacturers — some of which are major global suppliers of medical gloves — over forced labour and suspected abuse of foreign workers. The US has banned imports from seven Malaysian companies in the past two years.

YTY has publicly said it is surprised by the US ban and is seeking engagement with the customs authority, while demonstrating it is compliant with local labour laws, Ansell said. But the company said an audit last year revealed one labour issue at YTY, which it said it has since “remediated”.

“Ansell’s most recent third party audit for YTY in April 2021 indicated that it was compliant with local labour laws with one exception, which YTY publicly stated was remediated by June 2021,” Ansell said in a statement to the ASX.

“In line with the advice of human rights and labour experts, Ansell’s preferred practice regarding labour rights in our supply chain is to work with suppliers to achieve meaningful improvement, thereby ensuring continued employment and improved conditions for these workers, rather than reactively cancelling supplier contracts in response to specific events or allegations.”

Ansell said it was “asked” to shut down one of its Malaysian factories for a week last Thursday to contain a Covid outbreak.

“Since the start of the calendar year, our manufacturing facilities are again seeing increased incidences of Covid-19. On January 27, one of our factories in Malaysia was asked to shut down completely for a week, pending retesting results in an effort to contain the virus.

“It is difficult to anticipate if increasing Covid-19 infections will lead to other factories having to shut down or operate at partial levels.”

Ansell now forecasts earnings per share for the current financial year to be in the range of $US1.25 to $US1.45 — down from a range of $US1.75 to $US1.95 flagged as recently as November 11.

Mr Salmon said the faster than expected slowdown in demand for Ansell’s products “made it more challenging for our supply chain to adjust given the timing difference between placing and receiving orders and also led to reduced inventory turns.”

Meanwhile, amid labour shortages and blowouts in delivery times, “some orders across all businesses were not fulfilled as expected in the first half.”

Rising inflation, including higher than expected growth in freight and labour costs, also cut into margins.

“We can offset inflation with pricing over time, but currently our pricing increases are running behind inflation at the moment,” Mr Salmon said.

At the same time manufacturing shutdowns imposed early in the financial year, led to lower recoveries of fixed costs. Ansell’s recovery of lost output was slower than anticipated.

Mr Salmon said staff shortages caused by closed international borders and low unemployment had limited the ability for Ansell to catch up on lost production caused by Covid-19 related lockdowns and restrictions.

“Our overall revenue was pretty good, but a shortage of workers is hurting us from catching up,” he said.

“Local employment conditions are very strong at the moment and that makes it difficult to secure workers, especially for manufacturing jobs.”

Ansell added that it had not factored into its trading update any impact of Omicron beyond the impacts known to date.

It expects to deliver first-half sales of $US1.009bn, earnings of $US111m and earnings per share of US61c, based on unaudited accounts.

Macquarie analysts said Ansell’s revised guidance, which was down 27 per cent at the midpoint, was 20 per cent below general market consensus.

The broker has Ansell as an “underperform” recommendation with a 12-month price target of $30.70.

Ord Minnett analysts said: “the company faces some challenges ahead with one Malaysian factory closed for a week and also a US export ban for one of its major exam glove suppliers”.

“We view these conditions as challenging for Ansell in the near term and look to its 1H22 (six months to December 31) results on February 15 for greater clarity.”