Ansell reveals why cheap and cheerful is no longer the best strategy

The company is facing a perfect storm of supply chain disruption, softening demand and a US import ban from a key supplier - but its quality products gives it an edge.

Ansell CEO Neil Salmon says US Customs is a “very powerful body in driving home the message of the importance of compliance” in modern slavery.

Cheap is no longer cheerful, with manufacturers like Ansell, facing increasing pressure from customers to prove their products are made more cleanly and ethically.

The shift comes as Ansell is scrambling to replace one of its biggest suppliers, YTY Industry Holdings, after US Customs banned imports from the Malaysian vendor, citing forced labour.

Ansell chief executive Neil Salmon said the company was assessing a range of alternatives, including making more of its products in-house.

The company has warned as much as 35 per cent could be wiped off its full-year earnings as it battles a more-sudden-than-expected softening of demand for key products, as well as manufacturing shutdowns, higher freight and labour costs, and longer delivery times.

But taking greeting control over supply chains can help insulate against such shocks, with Tesla adopting such a model to great effect, allowing it to navigate supply chain challenges and report a $US5.5bn ($7.74bn) annual profit, on revenue of $US53.8bn last calendar year.

Mr Salmon said Ansell would not move to 100 per cent in-house production, but action like the US ban on YTY has created “further reason to move down that path”, which also serves modern customer expectations.

“Already today we‘re getting access to key customers globally, who in the past would have been more oriented just to price as a decision making criteria,” Mr Salmon said.

“Now they‘re looking at ‘can I work with someone who gives me transparency into my supply chain’. And that criteria, visibility of confidence in ethics and so forth, and also the sustainability journey that’s just beginning, is opening doors to two aspects of the market that previously we didn’t have such a strong value proposition. And insourcing is key to that.”

Ansell has been expanding its manufacturing capacity in recent years, including installing 13 new production lines as well as expanding into Russia, where parochialism - like former US president Donald Trump’s “make America great again” slogan - has strong resonance.

“Russia is an important market to us. And we‘ve extended our Russian presence. We have local manufacturing in Russia, because we know that ‘made in Russia’ is a key aspect to PPE (personal protective equipment) adoption in the market,” Mr Salmon said.

And Russia is a fan of Ansell’s surgical gloves, with Mr Salmon saying it was one of its biggest markets. But its Russian manufacturing operations is still “small scale at this stage”.

This raises questions about the increasing likelihood of Russia invading Ukraine and potential sanctions from Western countries. But Mr Salmon said essential items, like protective clothing and surgical gloves, are unlikely to be unaffected from sanctions.

“Many of the products that we import are also, I think, under most sanction regimes would be considered essential items. Even sanctions on Iran and other countries have tried to ensure that medical procedures can still happen.”

The threat of a Russian invasion in Ukraine has also pushed oil prices to their highest level in more than seven years this week, sending bowser prices closer to $2 a litre.

Higher oil prices not only increase freight costs but also raw material prices in companies, like Ansell, that use petrochemicals. But Mr Salmon said it was too early to say what spillover effect the rise in oil prices will have on the company.

“Raw materials, we expect to be fairly stable, even some downward trends.

“It remains to be seen what the recent run up in the oil price and what effect that has, but typically, it‘s quite a delayed response between the oil price changing and then several steps down the value chain before you get to the polymers that we buy that are based on petrochemical inputs.

“So it‘s not for sure that an oil price shift will drive price changes in what we buy.”

Overall, Mr Salmon expects full year earnings per share could fall as low as US125c. This compares with US192.2c the year before, with the softening of demand the main factor.

It comes after Ansell’s revenue firmed 7.6 per cent to $US1.01bn, while earnings before interest, tax, depreciation and amortisation dived 24.3 per cent to $US111m in the six months to December 31.

“First half results were delivered in a challenging external environment,” Mr Salmon said.

“Our manufacturing operations in South East Asia were impacted by intermittent Covid-19 driven shutdowns early in the half.

“At the time, we expected these would be short term in nature which would allow us to make up for this lost production in subsequent months. However, achieving this was hampered by limited availability of labour and continued logistical delays, contributing to increased backorders for key product styles.”

Across its healthcare business, EBIT margins fell 820 basis points to 10.1 per cent, which Mr Salmon said was more than anticipated at the start of the year.

“Demand softened faster than anticipated, which made it more challenging for our supply chain to adjust and resulted in delays before we could sell through high-cost inventory bought from outsourced suppliers in earlier months.”

“We are seeing strong interest in new products that address important unmet safety needs, we are winning new customers for our more differentiated product lines and we are seeing continued strong growth in emerging markets.”

The company will pay an interim dividend of US24.25c a share, unfranked, on March 9. This compares to an interim payout of US35.4c last year.

Macquarie analysts said next financial year “appears to represent a base for more normalised earnings/growth into the medium-longer term”.

“We continue to see a degree of uncertainty in relation to the near-term outlook (Covid-19, supply chain impacts), with headwinds from the reversal of benefits recorded within Exam/SU (surgical use glove) in FY20/21,” Macquarie analysts said in a note to investors.