Ansell (ASX:ANN) share price gains despite profits tumbling 27% in 'challenging' half

The first half was a tough slog for the personal safety and protection equipment manufacturer.

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Key points

  • The Ansell share price opened slightly lower before boosting upwards after the release of the company's first half earnings 
  • The company has met its recently slashed sales guidance, with its earnings per share, dividend, and profits all falling between 26% and 27%
  • The disappointing performance was driven by COVID-19 challenges and lower demand

The Ansell Limited (ASX: ANN) share price is in the green on Tuesday after the company released its earnings for the first half of financial year 2022.

At the time of writing, the Ansell share price is $25.92, 0.64% higher than its previous close.

Ansell share price higher despite disappointing first half

  • The company saw around US$1 billion of sales over the half year – a 7.6% increase on the prior comparable period
  • Its earnings before interest and tax (EBIT) came to US$111 million – down 24.3%
  • The company's profits for the half year slipped 27% to US$77.6 million
  • Ansell reported 60.6 US cents of earnings per share (EPS), representing a 26.5% drop
  • Its operating cash flow came to US$22.1 million
  • The company announced an interim dividend of 24.25 US cents per share – a 26% drop on its previous interim dividend

Over the 6 months ended 31 December 2021, the personal safety and protection equipment manufacturer saw its sales grow despite increased challenges.

The company said its overall EBIT margins fell to 11% due to the performance of its healthcare global business unit. The unit saw its own EBITA margin drop by 820 basis points to 10.1% on softer demand.

Ansell's operating cash flow was weaker due to a drop in profitability, employee costs for financial year 2021, and an increase in working capital.

The company's manufacturing operations in South East Asia were hit by COVID-19-induced lockdowns early in the half.

Following the lockdowns, the company found itself facing a labour shortage and logistical delays, contributing to increased backorders for some products.

Its 24.25 US cents interim dividend represents a payout ratio of around 40%, consistent with Ansell's dividend policy.

It ended the first half with US$382.1 million in debt and US$182.9 million of cash and equivalents.

What else happened during the half?

The company's healthcare global business unit's sales for the first half came to US$632.1 million – 15% more than during the first half of financial year 2021. It saw organic growth in all its strategic business units.

However, its Exam/Single Use unit outsourced products' sales volumes dropped due to increased supply and third parties apparently reducing inventory levels.  

Selling high-cost inventory from outsourced suppliers at lower margins, COVID-19 related manufacturing disruptions, higher freight costs, and the company's share of loss from Careplus joint venture were key drivers for EBIT margins' fall.

Meanwhile, Ansell's industrial global business unit saw US$377.1 million of sales over the half – 2.8% lower than the prior comparable period.

The business' Mechanical unit grew 3.2% while its Chemical unit's growth slumped 10.9%.

What did management say?

Ansell managing director and CEO Neil Salmon commented on the half year just gone, saying:

Ansell's [financial year 2022] first half results were delivered in a challenging external environment…

Even in this challenging and complex operating environment we have made significant progress against the most important longer-term drivers of value creation. 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.

Sales growth was encouraging across most of our portfolio as we successfully executed on our long-term strategic plans.

Surgical and Life Sciences grew above market rates showing the benefit of some important new business wins.

Mechanical achieved respectable growth in a mixed industrial demand environment, delivering very strong results in emerging markets and success with new products.

What's next?

As market watchers might have noticed, Ansell dropped its financial year 2022 guidance late last month to the detriment of its share price.

It now expects to provide between 125 US cents and 145 US cents of EPS for financial year 2022.

That assumes sales growth for its Industrial and Surgical and Life Sciences businesses for the second half due to higher production and a seasonal sales increase.

It also assumes that the company's Exam/Single Use unit will see a drop in sales in the second half but that its prices will stay above pre-COVID-19 levels.

Finally, it assumes outsourced supplier costs will continue to fall.

Ansell share price snapshot

The Ansell share price has tumbled into 2022.

It has fallen 21% year to date. The drop can mostly be attributed to the 14% plunge experienced after the company downgraded its guidance.

The Ansell share price is also 32% lower than it was this time last year.

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ansell Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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