-  Solid sales growth in emerging markets, Asia Pacific region and Sexual Wellness globally
-  Strong EPS growth despite tough European economy and ERP rollout issues in North America, demonstrating resilience of Ansell’s diversified business and geographic portfolio
-  Continued capex investments in expanding plant and R&D capabilities, and SG&A investments in building up sales and marketing teams/infrastructure 3 Key points

openbriefing.com
Ansell Limited today reported net profit of US$66.6 million for the first half ended December 2011, up 9 percent from the previous corresponding period.  EPS was US$0.506, up 10 percent.  You’ve maintained your US$0.97 to US$1.03 EPS guidance range for the year, up from US$0.916 last year.  Given soft economic conditions in your developed country markets and issues around your Fusion ERP implementation, how confident are you of achieving this guidance?

CEO Magnus Nicolin
We’re confident about delivering results within our EPS guidance range of 6 to 12 percent growth for the full year.  We continue to see good results in emerging markets, including in our Asia Pacific (AP) region, and we expect the US economy to grow 2 to 3 percent over the next six months – not robust but it is growth.  Yes, Europe is an obvious concern but we’re not counting on economic growth there.  Our ERP implementation clearly hurt us in H1 and will have a smaller residual negative effect in H2 but we expect the remaining issues to be resolved by June.

CFO Rustom Jilla
Please also remember that our results are not solely dependent on economic conditions.  About 45 percent of our revenue and segment EBIT comes from our Medical and Sexual Wellness businesses – which are not strongly correlated to broad economic growth.

openbriefing.com
Sales increased 5 percent in the first half.  Across the businesses, volume growth seems low, while higher prices and a positive product mix helped drive total sales higher.  To what extent can price increases be maintained in a soft volume environment?

CEO Magnus Nicolin
Our price increases last year only recovered about 60 percent of the extra costs we incurred.  So far this year, raw material prices have declined but our average cost remains higher than in F’11 H1. Raw material prices also remain quite volatile.  In natural rubber latex (NRL) for instance, we saw the price fall to MYR6.38 per wet kilo in December 2011 from a high of MYR8.92 in July 2011, but last week it was MYR7.63.

Volumes have been disappointing in North America due to the ERP implementation and in Europe, Middle East and Africa (EMEA) where we combined our two principal warehouses into one to prepare for the coming ERP rollout there.  Given that input prices are still high and given the extent of NRL and nitrile butadiene rubber (NBR) price volatility, it’s a little early to be thinking about price reductions.

openbriefing.com
The rollout of Fusion was designed to consolidate 25 legacy systems into a single global platform.  The first phase of the implementation, which went live in July 2011, has experienced design and interface issues that resulted in US$13 million to US$15 million of lost sales.  What ability do you have to rectify these problems in the near term?  What is the expected impact on current year earnings and has there been any change to the end benefits expected from Fusion?

CEO Magnus Nicolin
We needed an ERP system to improve our processes and efficiently support faster growth.  We went with a top tier ERP system, hired a top tier systems integrator and invested heavily in design and implementation – so we didn’t expect to run into quite as many issues as we have!  However, we’ve spent the last few months working on rectifying these issues and I have no doubt we’ll have a fully functioning ERP system during H2.

Meanwhile, we’ve offset part of the negative EBIT impact of Fusion through other savings and initiatives. It’s too early to assess the impact on end benefits because the system isn’t yet fully operational.  But there’s no reason to believe we can’t deliver, albeit with a delay.

CFO Rustom Jilla
If you simply apply our average margins on lost sales and then factor in extra distribution costs – it’s clear that Fusion is costing us a few cents of EPS.  However, we have factored the likely full year impact into our EPS guidance and are still guiding to grow F’12 EPS by 6 to 12 percent.

openbriefing.com
Free cash flow in the half was US$6.3 million, down from US$13.8 million, primarily reflecting a US$46.1 million increase in working capital partly due to Fusion.  What are your free cash flow and working capital targets for the current year?  What is the expected level of capex in the nearer term given your aim of improving Ansell’s competitiveness in manufacturing?

CFO Rustom Jilla
We don’t provide specific free cash flow targets, but we clearly need to return to generating cash as usual.  In H1, Fusion added US$25 million to US$30 million to working capital as high inventories were maintained to support customer service levels and there were delays in collecting receivables.  However, this will be steadily worked down and in the US in January, we collected about US$2 million more than we billed.  Quite apart from Fusion, we struggled with inventories in H1 and are making some changes to improve clarity and accountability.  Based on this, we’re confident we’ll generate solid free cash flow in H2. 

Capex was relatively high in H1 and will increase in H2 as we keep investing in production and R&D and incur the one-time capital cost of moving to a new office in the US.  So, between Fusion and our other investments, we expect F’12 capex to be slightly above F’11’s US$45 million.  Once Fusion is completed and the current surge in plant investment runs its course, annual capex is likely to be around US$25 million vs. non-Fusion depreciation of around US$20 million.  This is quite low, given our sales and profitability and partly explains our cash generation capability.

openbriefing.com
The Sexual Wellness GBU reported EBIT of US$18.8 million, up 72 percent, on sales of US$109.3 million, up 12 percent.  Sales growth was due to both branded condoms as well as private label condoms.  Are these growth rates sustainable?

CEO Magnus Nicolin
Private labels enable us to work with distributors/marketing companies in countries where we don’t have a presence.  Tenders and private label volumes also help us fill our factories and absorb fixed overheads but branded condoms are our main focus.  Our main global brand SKYN which is made from polyisoprene, continued to grow at a rapid clip, benefitting not only from its rollout to new countries, but also from organic growth in established markets.  Organic sales growth of 12 percent certainly isn’t sustainable in every reporting period, but there’s no reason we shouldn’t continue to see strong growth and EBIT/sales ratios in this business going forward.

openbriefing.com
The Industrial GBU reported EBIT of US$39.7 million, down 7 percent, on sales of US$243.6 million, up 5 percent, albeit volumes were down.  You’ve attributed the earnings reduction to Fusion, increased input costs and restructuring.  While historically Industrial has performed strongly, to what extent does this underperformance flag a change in momentum?  Can the business return to the higher profit levels of past years?

CFO Rustom Jilla
Industrial EBIT/sales was actually 17 percent if you add back the restructuring costs.  GPADE margins were slightly higher year on year despite all the factors mentioned in your question.  The real reason EBIT/sales margin was down on the comparative period was SG&A spend.  We’ve been adding or expanding infrastructure (e.g. sales offices) and have added to our sales and marketing teams in both developed and emerging markets.

CEO Magnus Nicolin
In the US, we’ve seen continued growth in the auto industry and positive economic data impacting other industries.  Our EMEA business did well but this was driven by a strong first quarter.  We’re not expecting economic growth in Europe for the rest of the year.  AP is smaller but growing nicely and Latin America and the Caribbean (LAC), which was also negatively impacted by our ERP implementation, should return to the growth levels we’ve seen in the last two years.  Our significantly increased investment in emerging markets in the last few years is also paying off.  In the past, we’ve said we’d be quite happy with EBIT/sales of 17 percent and strong sales growth.  That hasn’t changed.

openbriefing.com
The Medical GBU reported EBIT of US$16.3 million, down 22 percent, reflecting the impact of Fusion, latex prices and SG&A investment.  Sales were up 1 percent to US$172.2 million.  Much of the weakness in Medical appears to have been in the North American and European markets.  To what extent was the business impacted by economic conditions?  Where are the key profit improvement opportunities for the business?

CEO Magnus Nicolin
Strong growth in spending on healthcare always helps, but our flat sales in Medical weren’t due to macro economic conditions.  We shed low margin examination glove sales (which declined 9 percent) and will continue to do so.  Surgical revenues increased 3 percent with all our growth coming from our expanded synthetic surgical offering.  Synthetic is a key focus area for us and recent launches have been quite successful but we would like better results in NRL powder free surgical and have several initiatives underway.  Sandel surgical safety supplies are a bright spot with the acquisition integration going well and results broadly in line with the business case.

Organic GPADE (excluding Sandel) declined in H1, mainly due to higher NRL costs year on year, while SG&A increased as we continued to invest in people and marketing, as well as absorbing the SG&A from the acquisition.

In the second half, we should benefit from lower input costs compared with last year.  However, in the long term, profit improvement will come from new product launches, driving our synthetic surgical glove offering, expanding in new markets such as China, Brazil, South East Asia and the Middle East, and developing the Sandel business by taking it global.

openbriefing.com
The New Verticals GBU booked EBIT of US$4.8 million in the half, up from US$0.8 million in the previous corresponding period.  Sales increased 4 percent to US$86.4 million.  Is the profit improvement sustainable and can NV deliver EBIT margins more in line with your other GBUs?

CEO Magnus Nicolin
We created the NV GBU to focus on underperforming channels and develop new channels.  Although NV is moving in the right direction and its improvement is gratifying, its profitability is by no means at a satisfactory level.  We always aim for a 12 percent or better EBIT/sales margin and are looking to achieve this sooner rather than later in NV.  The progress in NV is solid on a number of fronts – the new focus brands ActivArmr, Projex and VersaTouch have been successful and old, fragmented brands are being phased out.  We’ve also launched new products in the construction, food and military channels.

Although NV is a new focus area for us, it’s not new to our customers.  So we’re in the process of changing the name of the GBU to “Specialty Markets” (SM GBU) and you’ll see this re-naming completed before our next results release.

CFO Rustom Jilla
As Magnus said, NV must deliver 12 percent, and it will - but in the medium term.  Some of H1’s profit improvement came from selling through higher value channels and some from manufacturing improvements in our military glove business.  But part of H1’s improvement simply reflects the mechanics of how NRL cost movements in our consumer household glove business are shared with our marketing partner with a built-in lag.

openbriefing.com
Over the first half, growth came from sources including two small acquisitions, new products launched and emerging markets.  Where do you see Ansell’s growth coming from in the medium term?  Is your emphasis turning more to opportunities such as your recent investments in technology partnerships such as those with Starpharma and Yulex?  How does the expected investment/return on such partnerships compare with an acquisition?

CEO Magnus Nicolin
We’re broadening our horizons – our business development initiatives include both M&A and partnering with organisations with special technologies, new raw materials or other opportunities that fit with our business.  We‘re actively searching for acquisitions but at the same time we’re seeing more and more technology partnership opportunities and will be chasing them with just as much vigour.

CFO Rustom Jilla
The expected returns on our different investments, technology or otherwise, vary quite a bit, but all meet our financial hurdles and are attractive.  We are opportunity agnostic – we will invest to grow across the various GBUs, via plant investments, acquisitions, technology alliances etc., provided they fit within our strategy.

It would also be more efficient to make slightly larger acquisitions, as the work required is not much different to when one makes smaller acquisitions.  It’s important to keep in mind not just our balance sheet but also our ability to evaluate and integrate acquisitions.  That said, we have plenty of capacity on both counts, and currently have some very attractive acquisition and investment/alliance opportunities in our business development pipeline.

openbriefing.com
Despite the increase in gross debt to US$312.2 million at the end of December 2011 from US$264.7 million a year earlier, Ansell’s gearing level remains low at 13.5 percent.  However the dividend payout ratio for the first half remains 30.4 percent. Given the strong balance sheet and outlook for the full year 2012, can we expect a rise in the payout ratio?

CEO Magnus Nicolin
We’ve had a long history of increasing dividends and this half is no exception, with a dividend of 15.0 Australian cents up from 14.0 cents last year.  Our H1 payout was effectively around 30 percent in both F’12 and F’11.  The final dividend payout (and ratio) will be reviewed by the Board in August but if you look at the last couple of years, we’ve paid out around 35 percent for the full year.

openbriefing.com
Thank you Magnus and Rustom.

For more information about Ansell, visit www.ansell.com or call General Manager – Finance & Treasury David Graham on (+61 3) 9270 7215

DISCLAIMER: Orient Capital Pty Ltd has taken all reasonable care in publishing the information contained in this Open Briefing®; furthermore, the entirety of this Open Briefing® has been approved for release to the market by the participating company.  It is information given in a summary form and does not purport to be complete. The information contained is not intended to be used as the basis for making any investment decision and you are solely responsible for any use you choose to make of the information.  We strongly advise that you seek independent professional advice before making any investment decisions. Orient Capital Pty Ltd is not responsible for any consequences of the use you make of the information, including any loss or damage you or a third party might suffer as a result of that use.