Thank you for joining us today. I'm Anita Chow, Head of Investor Relations at Ansell. With me, I have Neil Salmon, our CEO, and Zubair Javeed, our CFO. As you may be aware, we released an announcement to the Australian Securities Exchange this morning providing an update on our FY 2022 trading and business. Today, Neil will provide some opening remarks, and then we will open up for questions. Before we begin, just some basic housekeeping. You can ask questions by text or audio. To submit questions by text, select the messaging tab at the top of the Lumi platform on the left-hand side. At the top of the tab, there's a section for you to type your question. Once you finish typing, please hit the arrow symbol to send.
Alternatively, to ask a live audio question, you can do so by using the phone number provided in Asking Audio Questions section or using the web browser by clicking on the link. If you use the web browser, please ensure you pause the broadcast on the Lumi platform. A new page will open where you'll be prompted to enter your name and the topic of your question before being connected. You will listen to the meeting on this page while waiting to ask your question. I will now hand over to Neil to commence the call.
Thank you, Anita, and good morning to you all. As you will have seen this morning, we updated the market on our trading performance, providing provisional results for our H1 and a reduced guidance range for the year. Let me begin by talking you through that announcement with comments on our H1 . I'll then provide some details of two recent events which we have had to factor into our revised expectations of the year, and then we'll take your questions. You will understand that as we have not yet published our half year results in full, there may be some questions you have which I'll need to defer to be addressed during our scheduled results call on February fifteenth. I will also not be in a position today to provide significant additional detail beyond that provided in our release earlier today.
Let me start by reminding you of our expectations for the year as we published our year-end results in August. We said we expected to see continued demand for mechanical, surgical, life science products, and our internally manufactured single-use gloves. We said lower demand was expected in areas which benefited most from COVID-19 in prior year, i.e., chemical body protection and undifferentiated exam and single-use gloves. We said pricing was expected to be a feature positively and negatively. These trends were all apparent in the half. Surgical and life science achieved good growth on strong demand. Mechanical performed above our expectations in emerging markets, and that overcame weaker than anticipated demand in mature markets to record solid mechanical growth overall. For single-use and chemical, we did experience lower demand with the dip in demand more pronounced than anticipated.
A significant factor was high levels of inventory ahead of us in the supply chain. We continue to expect demand conditions to normalize once excess customer inventory is worked through. Encouragingly, even in these challenging market conditions, our in-sourced single-use products under our TouchNTuff brand name did well, recording volume growth over last year and supporting our investment case behind the construction of our new in-house manufacturing capacity in Thailand. Although single-use volumes overall were below expectation, pricing developed largely as anticipated, and we have also secured lower pricing from our outsourced suppliers. Our reported margins were lower for reasons I will now turn to. As we indicated at the start of the year and in my comments at the AGM, we anticipated H1 margins to be lower as a result of a number of factors that will be of limited time duration.
The biggest factor is that although both our selling prices and our outsourced supplier purchase prices reduced in the half, the half year result reflects fully the impact of lower selling prices. However, the benefit of lower purchasing prices has been substantially delayed by the consequence of lower demand, leading to a slower than expected sell-through of higher cost inventory purchased at the higher prices of some months ago. As demand returns and selling price and cost prices come back into line in the P&L, this effect will normalize. The other factors negative to H1 margins were the cost of the manufacturing shutdowns in the first couple of months of the year, and inflation factors, particularly on logistics costs, which came in higher than expected. These were partly recouped by price increases, with additional increases having taken effect from the first of January 2022.
We were successful in partially offsetting lower GP margins through tight management of SG&A expense. The final factor impacting H1 performance versus earlier expectations was challenges we experienced catching up on the lost production arising from COVID-related shutdowns earlier in the year. Continued shortages in worker availability, particularly for packaging operations and further delays to shipping lead times contributed to a sales shortfall in the final months of the half, as orders on hand could not be fulfilled during the half. In summary, most of our businesses performed in line with expectations in the half. For single use, we saw a steeper dip in demand of outsourced single-use products than expected. Continued supply chain disruption held back the realized revenue of all businesses, and margins were lower for the reasons stated.
Let me now comment on the two recent events which we have disclosed to the market today and which we have considered in our updated guidance range. Firstly, we were required by local authorities to shut one of our Malaysian facilities on Thursday of last week after we reported to them a moderate rise in the positivity rate of our ongoing COVID testing. Our revised guidance assumes we will be able to restart production within the next few days, consistent with the guidance given by local authorities. Achieving this will be subject to reduced positive testing rates prior to the restart. Secondly, late on Friday the 28th, U.S. time, we became aware of a Withhold Release Order that U.S. Customs and Border Protection issued against YTY Industry Holdings. YTY is a key supplier of single-use gloves to Ansell, primarily to customers in North America.
As a result, we have suspended our orders from YTY to customers in North America. We are now developing plans to ensure continuity of supply to customers through current product offerings or equivalent alternatives. Taking into account our lower than anticipated performance for the H1 , our current estimate of the impact of disruption to manufacturing arising from the Omicron variant in the H2 , and our current estimate of the impact of the Withhold Release Order on YTY on our U.S. sales, we are today lowering our guidance range to a new range of AUD 1.25-AUD 1.45. While I take no satisfaction from having to deliver this news to you today, I want to reiterate that across most of our businesses, our performance is continuing to develop in line with expectations and with significant growth from pre-pan-pandemic levels to today.
The primary reasons for our lower expectations for earnings in this fiscal year are the impacts of the news announced to you today and the lower performance of the exam and single-use business as a result of challenging market conditions. Let me conclude by saying I remain confident in our strategy going forward and in the value and growth prospects of our business. We have a committed and talented Ansell team who are determined to deliver on our strategic goals, and I look forward to providing more details on this at our half year results release on February the 15th. Now let me hand it back to Anita, and I will take your questions.
Thank you, Neil. We can commence the questions. You can ask questions either by audio or written, using the instructions I noted earlier. To start off the call, we have a question from Sean Laaman. Sean, please go ahead.
Good morning. Good morning, Anita. Good morning, Neil. Neil, I was just wondering if you could sort of characterize some of the cost pressures a bit more. I mean, the revenue number seems pretty good, but the margin, well, to be quite frank, seems horrible. How could you or could you sort of more characterize how much of this margin issue is associated with the pressures in exam and single use and sort of how much is sort of COVID and elevated cost related and potentially transient? If you give us a bit more characterization, that would be very useful.
Yeah, I'll try to give you some more color. As I indicated at the front of this call, though, I'm not in a position to provide more specifics than in the release. Yes, a very significant factor in the weaker half margins were those factors that it will be of temporary duration. If we consider our ability to manage the purchase price of finished goods where we are outsourced versus the selling price, then I'm pretty satisfied with how we are managing that. The primary factor is the delay caused by the cost of goods sold, representing inventory purchased some months ago, relative to selling prices which reflect current market conditions. That's the major impact.
As demand conditions stabilize or return to growth, and as we work through that higher cost inventory, then that factor will normalize and margins will return to their underlying level. The second, smaller but still significant impacts in the half were the manufacturing cost outages at the beginning of the year. We recovered from those and manufacturing rates continued, but we were not able to get back up to full operating rates because of labor shortages, as I mentioned, and then additional freight and logistics costs. Now, I do think we can offset inflation with pricing over time. Currently our price increases are running behind the rate of inflation, and so that lag effect was present in the half. I hope that gives you a little more color to the half year margin shrunk.
Yeah. Thank you. Next question is from Gretel Janu. Gretel, please go ahead.
Thanks very much, Anita and Neil. Just in terms of the guidance range, it implies a strong H2 here now. I guess what gives you the confidence that will be achievable? Is it that you do expect demand to return or is it more costs that are set to moderate now? Given on that cost side of things, there's still a lot of uncertainty with COVID and labor shortages. Is that still really possible at this point in time to see those costs really ease from here?
Well, I remind you that in almost all years, Ansell's weightings have been weighted to the H2 , so it's a fairly normal seasonal pattern in our business. Yes, based on current market trends and forecasts, that impact that I described in the H1 of selling prices being out of step with cost prices, I expect that effect to be much bigger, I should say, in the half completed than in the half to come. There is the normal seasonal pattern in our business, a lesser impact from that cost lag effect. As I've mentioned already in this call, we continue to see demand conditions strong in our other businesses, and we expect that also to support H2 earnings in those businesses.
Okay. Thanks. Next question is from Saul Hadassin. Sal, please go ahead.
Thanks. Good morning, Neil and Anita. Neil, can I just ask about YTY and the withhold order? Are you able to quantify sort of what percentage of your outsourced single-use and exam gloves that they represent? I guess as it relates to the guidance and the suspension of those orders, what have you factored into in terms of resolution of that issue and the ability to source those gloves potentially from other third-party providers? Thanks.
Yes. I'm not at liberty to provide specifics on any individual supplier that's commercially sensitive information. They are one of our top five suppliers within the single-use outsourced portfolio. As you remember, we are outsourced around 80% of the total single-use. We have assumed at this stage limited ability to replace YTY lost demand with alternative sources. What has happened in the past is that inventory already in market has been permitted to be sold to customers. That reduces the impact over the next period of time. Beyond the availability of inventory in market, we are still developing those plans. As you would appreciate, this news is fresh as to what other products will be suitable for customer needs.
I would note that this will have a bigger impact on the total U.S. market than on Ansell, as YTY is a significant supplier to other customers in the U.S. market as well.
Okay. Thank you. Next question is an audio question from Vanessa Thomson. Vanessa, please go ahead.
Morning, team. Thanks for taking my question. I wonder if you could estimate how much of the margin compression you're seeing has been driven by the COVID operational challenges as separate from the softer demand for exam gloves. Thanks.
Yes. Unfortunately, I need to say again that I can't give you any more specifics at this point. We'll look to provide more details in our half year results. I would say, though, that that was a smaller impact than the primary factor I talked about, which is the lack of synchronicity between selling purchases and cost of goods sold. So a factor in half, but not as big as that first one.
Okay, thanks. Next question comes from David Low. David, please go ahead.
Yeah. Neil, could we just start with the labor issues and the inability to keep up with demand? Sorry, I missed some of this audio. It cuts in and out when you ask a question, so apologies if you've answered this, but how much of an impact was that? I guess more importantly, how much of an impact is it gonna be in the H2 ?
There's a couple of reasons why this is happening. Firstly, borders are currently closed to migration, so there's no chance of additional foreign workers available to us or anyone in the industry. The second is local employment remains quite strong, and so it's difficult to secure local workers, especially in a manufacturing environment. The third impact is that COVID isolation rules, as we've seen worldwide, meaning you see periods of time when people are not available to work. Now, we have managed that pretty well through the pandemic by putting in place reserve crews who are available to step in when existing workers are not available. But our ability to source and hire and train reserve crews is, of course, also affected by the lack of worker availability.
As was noted by a questioner earlier, our overall revenue was pretty good in the half. It's mainly that this shortage of workers has prevented us catching up that lost production in the first couple of months. When earlier I expected a stronger rebound, and the full year effect of lost production to be mitigated by recovery later on. This loss of worker availability has meant we have not been able to catch up. And if anything, the demand has continued to run higher across most businesses than our ability to supply. That gives you a bit more color on the issue of worker availability. Now, we do expect that to normalize going forward. I can't give you a date estimate.
Countries have pushed back the timeline on which they expect to allow new workers to cross borders. That day will come. I hope that it will come in the H2. I'm not able to give a forecast on that currently because it's clearly outside of my control, and subject to government regulation.
Okay. Thank you. Next, question comes from Dan Hurren. Dan, please go ahead. Dan, are you still there?
Sorry, do you hear me now?
Yeah. Thanks, Dan.
My apologies. Right. Sorry. We've just heard you talk this morning. There's a whole range of sort of recurring and non-recurring events, but perhaps could we simplify it? This downgrade particularly appears to have been driven by these further developments this week, the shutdown in manufacturing and the CBP. Could we think if we had not have had these two issues, would we still be downgrading? In other words, are the issues outside these two material issues?
It's not only those issues. I would say it's a combination of H1 results ending somewhat lower than originally anticipated. We did expect a weaker H1 , though, as I indicated at the AGM. It was a little bit weaker than my view then. More significant was our inability to fully catch up on lost production throughout the year, for the reasons that I've already noted, together with those additional external factors and news that I've just announced over the last couple of days. It's a combination of all those items rather than only one or two of those.
Okay. Okay. Next, we have some written questions. We have a question from David. Finished goods inventory was elevated as of 30 June 2021. Has there been any inventory write-down as part of the H1 FY 2022 result and revised FY 2022 guidance?
Yeah. Unfortunately, I think that's a question that I'll have to defer to our full year results release, and we'll provide further details then.
Okay. Thanks, Neil. Another question from David. Do you see any risk in relation to price deflation for branded exam and single-use products?
Well, I'd refer back to a couple of comments I made already. The first is, well, branded single-use products are in two categories. We have our sub-brand TouchNTuff, which applies to products sold primarily into industrial end markets, where industrial hazard is higher, and in particular, chemical splash or other hazards are present. TouchNTuff has long been differentiated in the market, and there's really no exact competitive equivalent. This is the product range that we're investing behind in our new Bangkok manufacturing capacity, and this is the product range that still saw encouraging volume growth year-over-year in the half, even in these very, very challenging overall market conditions for exam and single-use. I draw encouragement from market demand, and of course, market demand influences pricing for that product range.
On our Microflex branded products, which are largely outsourced, as I said, we anticipated price declines. Those price declines did eventuate in the half, but pretty much in line with our original expectations, even though demand was quite a bit softer than our original expectations. That gives me some confidence that we're able to manage pricing fairly well, and at least consistent with market trends. What happens from here in exam single-use remains with some uncertainty, but I am encouraged by the strength of our differentiated portfolio, the returns I expect on that investment, and also the fact that pricing is largely developing as expected. I would say that over the period of the next couple of years, we did anticipate this normalization of exam single-use market conditions.
What's happening is that it's taking place quicker than we expected, and with a bigger impact in this year, and in particular, the H1 , than we had previously anticipated.
Okay. Thanks, Neil. We also have a question from Andrew Paine. You mentioned some distributors are working down high levels of inventory before reordering, and you've previously noted there was some coupling of products with high demand exam single-use gloves. Is this the effect being worked through here, or are there any other factors at play? And then how long do you think this will persist?
Yeah, I think to that last part, it's difficult for me to give an accurate expectation for how long it will persist. We typically don't get comprehensive information back from the channel on levels of inventory. This is not just distributor inventory, but also end-user customer inventory, which is even more difficult for us to estimate. We hear reports in some markets of inventory conditions normalizing, but in the bigger markets, we have not reached that point yet. I have not enough information to give you a forecast on when that will happen. I do believe that this excess inventory is the larger reason behind the demand decline, as opposed to any shift in Ansell's market position.
We are encouraged by continued customer conversations that we have, indicating our relevance in the exam and single-use market remains, and if anything is increasing, as a result of our integrated supply chain, and strength of portfolio and customer relationships. I think yes to your answer. The primary factor behind demand weakness is that inventory correction.
Okay. Thanks, Neil. One last question from David Low. Can you please provide an approximate percentage drop in exam and single-use glove prices? Have prices dropped to pre-pandemic levels or below? What is assumed in the revised guidance?
I can't give you Ansell guidance on that yet. That's further detail that we'll consider for our half-year results disclosure. I think I better leave it at that. You can read market conditions from others who've published results, but those, we're not all in the same market. The great majority of the single-use market is the standard thin nitrile used in medical exam. That is a part of our business, but only a small part of our business, as you know.
Okay. We've had a few more questions come through. Next one from Marlon Chan. Given YTY is out of the U.S. market now, would you expect price trends to reverse as inventory clears or customer stock up ahead of YTY coming out of the market?
It's too early for me to give an indication of what I expect, how I expect the market to respond to YTY being out. We'll have to see how that. Sorry, not to be able to give you a more accurate forecast at this point.
Okay. Thanks, Neil. Last one from Andrew Paine. With some orders not being fulfilled in H1 FY 2022 due to manufacturing issues, will this provide some form of a tailwind to sales in H2 FY 2022?
Well, it's that factor that originally I was quite confident in, particularly in earlier comments I made, at our ability to catch up over the year. As far as I'm aware today, the demand behind those orders still exists. We have, I think, done well with regards to customers overall during this period in maintaining supply and staying very focused on the same strategies that were developed pre-pandemic and that will drive us ahead post-pandemic, in contrast to some competitors who've been more opportunistic, shall I say, in which markets they've chosen to service during this time period. I think that strategy will bear dividends long term. We know that customers appreciate this aspect of how we've behaved.
I think that's an important factor going forward. The timeframe in which we can catch up on that demand exceeding supply, though, is what I'm now more uncertain about, and it's for the reasons that I've mentioned. Whereas I expected logistics conditions to start improving and for there to be sufficient capacity in shipping lanes for us to begin catching up on delayed orders, so far that has not happened. If anything, we've seen continued lengthening of logistics lead times. Then secondly, that impact to worker availability has just kept our manufacturing sites from operating at their absolute peak levels and has also constrained our ability to catch up on those back orders.
At some point, I believe we will have that tailwind, but I'm not at this point able to predict when it will occur.
Okay. Thanks, Neil. That takes us to the end of the questions.
Well, thank you for your time today. Thank you for the questions. We look forward to updating you further with our half-year results on February 15.