The Ansell Limited (ASX: ANN) share price has been taken to the cleaners this morning after downgrading its FY22 guidance.
Currently, the Ansell share price is down 12% to $27.56.
Ansell is a global producer of personal safety products including such as gloves, goggles, face masks and protective clothing.
Costs hit profit despite top-line growth
Ansell provided a trading update on its first-half performance, where it recorded:
- Revenue of US$1,009 million, a 7.6% improvement year-on-year (YoY)
- Earnings before interest and tax (EBIT) of US$111 million, down 24.7% YoY
- Earnings per share (EPS explained) of US$0.61, down from $US$0.83 YoY
From a division perspective, mechanical, surgical and life sciences all recorded growth.
Conversely, demand moderated in Exam/SU.
Despite growing sales compared to the prior half, costs increased at a relatively higher rate leading to a fall in earnings.
Ansell cited several cost headwinds, including supply constraints, freight and labour, pandemic disruptions and customers delaying orders due to excess inventory.
“…volumes of outsourced finished goods were lower with a significant factor being a desire by distributors and end users to work down high levels of inventory before reordering”
Demand looks to have peaked
Over 2020 and 2021, Ansell incurred an abnormal demand for its products as the pandemic spurred the need for personal protective equipment across workplaces.
Subsequently, the business increased its orders from suppliers to capture demand, leading to a record FY21 result.
However, the company is now left with excess inventory as demand moderates, weighing on supply chains and reducing inventory turnover.
Furthermore, Ansell’s supply chains were hit even again when it was forced to shut down manufacturing facilities due to COVID-19 outbreaks.
Guidance slashed by 27%
Unfortunately for Ansell, the tough operating conditions in the first half have translated into the beginning of the second half.
One of its facilities in Malaysia was forced to shut down for a week as of January 27 to contain the spread of COVID-19.
Additionally, one of its suppliers has been issued a withhold release order (WRO) by the US.
A WRO is an issue noticed by US authorities when it believes imported goods may have been derived from forced labour in a foreign nation.
“Ansell’s most recent thirdparty 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)”
Given all the headwinds currently facing Ansell, management has downgraded guidance for the full year.
EPS is now expected to be in the range of US$1.25-$1.45, down from the US$1.75-$1.95 stated in November.
At the midpoint of guidance, it represents a 27% decrease in earnings for FY22.
My take
Notwithstanding the guidance cut, much of the issues plaguing Ansell currently seem to be transitory.
Supply chains should ease as cases slow. Subsequently, freight costs should fall and inventory will unwind.
Labour may remain elevated, but the long-term outlook still looks favourable for the company.
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