Ansell Limited (ANN)

CEO & CFO on FY Results & Outlook
20 August 2013 - CEO and CFO: Magnus Nicolin & Neil Salmon

In this Open Briefing®, Magnus and Neil discuss:
-  Earnings improvement in H2
-  Contribution of recent acquisitions and outlook for organic growth
-  Cash flow and balance sheet strength continue to support growth
Ansell Limited today reported net profit of US$139.2 million for the year ended 30 June 2013 (F’13), up 5 percent from the previous year, and EPS of US$1.065, up 5 percent.  After a 14 percent year on year fall in profit and EPS in H1, both net profit and EPS increased 24 percent in H2, partly driven by acquisitions, and you expect EPS of US$1.13 to US$1.18 in the current year ending 30 June 2014 (F’14), up 6 to 11 percent.  Given you will be cycling the earnings contributions of acquisitions made last year, what are expected to be the key drivers of this growth?

CEO Magnus Nicolin
F’13 turned out rather well!  After a slow start in H1, our team worked hard to achieve these results.  As usual H2 benefited from typical seasonal gains in comparison to H1 as the northern hemisphere summer holidays occur in H1, reducing sales.  However the main contribution to stronger results was the successful implementation of the initiatives we outlined in February including, M&A contributions, success with new products, increased productivity gains and no repeat of the H1 condom packaging facility closure costs.

The challenging external environment is expected to continue in F’14 but we also expect to continue building on the momentum created in the last half of F’13.  We’ll have a full year of profits from the four acquisitions made during F’13, the large number of new products launched in F’13 will result in higher sales and raw material costs are expected to remain low.

CFO Neil Salmon
I would also add that in F’13 there was a significant headwind from FX and although FX is always difficult to predict, at the moment we expect it to be modestly unfavourable to our consolidated US dollar result in F’14 as well.
Revenue was US$1,372.8 million for the year, up 9 percent, and EBIT was US$170.5 million, up 11 percent.  Excluding acquisitions, revenue from the underlying business fell 3 percent and EBIT increased only 4 percent.  Post the acquisitions, what is the organic growth strategy for the business?

CEO Magnus Nicolin
A key reason for the negative organic sales was the negative FX impact Neil mentioned.  Strip that out and underlying sales were up about 1 percent but with an improving trend in H2. 

Growth of 1 percent is still well below the level we think this business should be achieving however there were three reasons I would highlight.  Firstly the high level of acquisition and integration activity diverted resources from organic sales programs.  This included some planned sales eliminations of non-branded or low margin Comasec products.  Secondly, we’re only now building real momentum related to the new products launched in F’13.  It normally takes six to nine months for a new product to “take off” and many were launched late in H1 or in H2.  Finally, in H1 we experienced some negative residual effects of the ERP upgrade in North America.  By the end of the year we had addressed these issues and the North American business was showing growth again.  I’d also highlight improving results in emerging markets, where sales continued to grow strongly, with organic growth of 8 percent year on year. So given these factors I feel our organic sales performance was solid.

Our strategy to grow organic sales revolves around firstly, product innovation and staying ahead of the competition.  Secondly, improving manufacturing efficiency.  Thirdly, using our Guardian selling solution to help customers reduce hand injuries.  Finally, continuing to develop our presence in emerging markets.  Clearly, our strong brands and market leadership will also contribute to our success.

CFO Neil Salmon
One of my strong first impressions of Ansell has been the huge energy and commitment to innovation shown by our product development teams.  We have some excellent ideas and very promising products in the pipeline or that are already achieving results.  We have plenty of potential in emerging markets too.  There’s a lot to be done to fully commercialise all the ideas we’re working on, but the company’s efforts on innovation are impressive and I feel confident they will make a meaningful contribution to our results going forward.
Gross profit after distribution expenses (GPADE) was US$517.4 million, up US$59.5 million or 13 percent, and ahead of sales growth.  SG&A expenses were up US$42.2 million, or 14 percent, to US$346.9 million, including US$30.8 million relating to the acquired businesses.  What scope is there to further improve GPADE and will further material increases in SG&A be required for future growth?

CEO Magnus Nicolin
One thing I can say categorically is that our margins remain strong.  GPADE is up 300 bps since F’11, an excellent outcome in a difficult period economically.  SG&A has grown consistently as well, as we have been investing in innovation, marketing, sales coverage in new verticals, emerging markets and in new ERP systems.  These must continue but be balanced with what the business can afford.

CFO Neil Salmon
There are certainly significant opportunities to achieve efficiency gains going forward and I think we have a very strong organisation on the supply side of the business, with a lot of very promising initiatives in the works.  We’ve been resourcing for growth and as we achieve that growth we’ll gain leverage.  Having said that, there is always pressure on margins as in any business, but I’m confident that the business understands its cost levers and will continue driving for productivity as well as top line growth.
Partly due to investment of US$208.6 million in four acquisitions in F’13, Ansell finished the year with net debt of US$235.5 million and gearing of 23.3 percent, up from US$56.1 million and 7.2 percent respectively a year earlier.  Can you comment on Ansell’s current portfolio and your current balance sheet capacity and appetite for further acquisitions?

CEO Magnus Nicolin
Before I let Neil answer your question, let me say that we’ve been quite clear on the need to retain investment grade financial metrics at all times.  This will not hold us back but ensure that whatever we do on the acquisition front, we will not be stressed financially.

CFO Neil Salmon
From a balance sheet capacity point of view, Ansell is quite liquid with significant unused bank facilities and cash.  Over the last 18 months we have increased the average term of our debt maturities from 1.2 years to 4.8 years with the issue of some 8, 9, 10 and 12 year debt so we have a solid base to develop from.  We certainly have the funding capacity for a US$300 million-plus acquisition and will continue, as Magnus says, to keep our investment grade rating in focus as we review future M&A opportunities.

CEO Magnus Nicolin
From an appetite point of view, we continue to seek quality acquisitions that will be EPS accretive and earn attractive returns on capital.  We continue to look for companies with innovative solutions and products to complement our range, for example high-end protective clothing, differentiated ‘industrial’ gloves, businesses to grow our operating theatre safety business and opportunities to expand our global presence in condoms.  If these businesses came with new quality manufacturing capacity in efficient locations this would be a bonus as well.

Finally, after the many years of share buybacks and strong capital management that has been commented on favourably by the market on a many occasions, we feel confident that if we needed to issue shares, to fund a compelling strategic growth opportunity, there would be strong investor interest.
Free cash flow was US$128.0 million for the year, up from US$97.2 million, driven largely by higher earnings and depreciation, and in spite of a US$61.9 million increase in working capital to US$314.5 million, US$51.5 million of which was attributable to acquisitions.  How sustainable is free cash flow at this level?

CEO Magnus Nicolin
Free cash flow is a big focus for Ansell and we have a strong history of producing cash on an ongoing basis.  In addition we’ve seen opportunities to improve the working capital management of acquired companies so yes, there is upside to these numbers.

CFO Neil Salmon
I can see the potential to improve cash generation already.  Inventory management in particular is an area we can improve and I feel once Oracle and SAP are working as planned we’ll see steady improvement.  Magnus and I have also talked about the need to improve stock turns.  The biggest driver of cash generation is always profit and driving EBIT is something we’ll continue to do.

We’re investing at a higher capex rate than historically, but I think there is very strong benefit to be delivered from these investments.  We’re getting good paybacks on our productivity investments and of course some investment is needed to support growth.  Often the best returns a business can achieve are on organic capital investments and we’ll continue to encourage the business to come forward with high return organic investment opportunities in addition to our M&A focus.
Ansell’s Industrial business booked EBIT of US$93.3 million, up 11 percent, on sales of US$563.6 million, up 12 percent.  EBIT margin improved in H2 to 18.5 percent from 14.4 percent in H1, when you invested heavily in sales and marketing and R&D.  You’ve attributed the EBIT growth to raw material savings, rationalisation and operational efficiency.  What scope is there to continue these improvements? 

CEO Magnus Nicolin
Industrial’s H2 performance was impressive.  In poor market conditions, to achieve an EBIT to sales ratio of 18.1 percent for the half was a great result especially when it’s recognised that Comasec was still being integrated and started with returns below Ansell’s.

During the year the launch of a number of new products helped growth with the HyFlex® 11-518 being particularly well accepted globally.

Industrial still has opportunity to improve.  Comasec, once fully integrated with synergies in place, will be a driver, as will the new products.  We continue to expand in emerging markets and develop new products specifically for these markets.

We see no need to expand margins but we see great opportunity to expand volume.
Specialty Markets, which includes household and military-use gloves and protective clothing, booked EBIT of US$11.9 million, up 65 percent on sales of US$230.0 million, up 30 percent.  EBIT margin improved to 5.2 percent in F’13 from 4.1 percent in the previous year, reflecting improved product mix as a result of acquisitions, but still remains below the average for your other businesses.  What are the organic margin improvement opportunities in this business?

CEO Magnus Nicolin
I continue to feel the market is missing the future potential of this business.  We’re making great strides in creating a portfolio of new products for the channels we’re focusing on: food, construction, military, first responders and oil and gas.  The year was adversely affected by a significant drop off in demand in the military space due to the US sequestration and Afghanistan pull back.  The new products released this year however will help us going forward.

Our acquisition strategy to expand into high end clothing will drive this business as well.  In fact last year’s H2 improvement to over 7 percent EBIT to sales is substantially on the back of this expansion.  It will only improve with their full integration and a full year on board.
The Medical business booked sales of US$349.5 million, down 2 percent, but EBIT was up 5 percent to US$41.6 million and EBIT margin increased to 11.9 percent from 11.1 percent, principally reflecting planned exits from low margin examination glove sales.  With developed country healthcare budgets being cut, how susceptible is the Medical business to pricing pressure?

CEO Magnus Nicolin
I don’t think there is an industry in the world today that is not experiencing pricing pressure: it’s the new world order.  The Medical business is no different.  However in many cases we can make a stronger contribution to the management of healthcare budgets through the value of the products we sell.  That’s why we’re so focused on reducing hospital acquired infections and improving operating room safety, as well as continually improving our gloves.  We need to continue to differentiate ourselves with innovation based on technology and better products that reflect a deep understanding of market needs.  On top of this, improving manufacturing capabilities and efficiency to market will assist.

I’d also like to highlight that this business produced an EBIT to sales return of 13.0 percent in H2 and exited F’13 with an excellent running rate.
The Sexual Wellness business booked sales of US$229.7 million, up 6 percent, but EBIT was down 2 percent to US$32.7 million, due to increased advertising and promotion spending on the SKYN brand and costs associated with the relocation of the US packaging facility in H1.  EBIT margin improved to 15.5 percent in H2, up from 12.6 percent in H1.  Sales growth appears to have been driven by new products and increased advertising and promotion spend.  How sustainable is this growth strategy?

CEO Magnus Nicolin
Sexual Wellness had a strong H2 as the major SKYN® global advertising and promotion campaign ended in H1.  As a consumer business however it will always need a higher level of advertising and promotion than the other businesses.  This will continue, probably not at the level of H1 last year, but at a solid level.  Growth however is also reliant on new products and this year we’ll be releasing new products in the very successful SKYN® range.  We also continue to expand our offering in areas such as lubricants, fragrances and feminine hygiene.  All will be important going forward.
Ansell has announced that it will change its reporting currency to US dollars as of the current year and that it will also declare dividends in US dollars.  For F’13 you’ve announced an unfranked final dividend of A$0.22 per share, up from A$0.205 last year, bringing the full year dividend to A$0.38, up from A$0.355.  What is the rationale for changing your reporting currency and what impact will paying the dividend in US dollars have on the dividend Australian based shareholders receive? 

CEO Magnus Nicolin
Sales outside Australia account for about 94 percent of total sales, over 99 percent of our employees reside outside Australia and as a company we’re very global, with activities and staff in more than 35 countries.  The US dollar has been the international trading currency for decades and has been our main reporting and internal management currency for the last 10 years.  We felt it was now time to simplify how we manage and report on company activities, hence the move to US dollar reporting only.

In terms of dividends, we’ll continue to look to increase our dividend on a steady basis going forward as we have for over 10 years.  We’ve also for many years offered shareholders the opportunity to receive their dividend in a small number of currencies and that facility will continue to be offered.  I see little effect on shareholders from this change.
Thank you Magnus and Neil.

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