ANSELL LIMITED — Call Transcript 2009

Aug 16, 2009

Attention ASX Company Announcements Platform Lodgement of Open Briefing[®]

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Ansell Limited Level 3 678 Victoria Street Richmond VIC 3121

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Date of lodgement: 17-Aug-2009

Title: Open Briefing[®] . Ansell. CEO & CFO on FY10 Outlook

Record of interview:

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Ansell Limited today reported underlying net profit of US$83.3 million for the year ended 30 June 2009, down 8 percent from the previous year, and underlying EPS of US$0.612, down 6 percent. You expect a year on year sales drop in the first half of 2010, with growth picking up in the second half and full year EPS of US$56c to US$62c. Are you seeing any signs that your markets have bottomed? What gives you confidence that growth will pick up in the next 12 months?

CEO Doug Tough

The recession-driven softness we saw in F’09’s second half, which we expect to continue through calendar 2009, came from our Occupational sector. However, Consumer EBIT was flat while Professional profits grew strongly in the second half. Our performance in this environment certainly shows the benefits of our diversified business portfolio.

While Occupational markets remain fragile globally, we’re seeing some signs that the slow down in demand is flattening out. We expect total sales to be higher in the last six months of calendar 2009 (our F’10 first half) than the first six months of calendar 2009 (our recently concluded F’09 second half). Having said that, a double digit reduction in sales in the first half in F’10 compared to the strong first half of F’09 is still possible.

It’s too early to draw conclusions but we’re guardedly optimistic. Our confidence in an improvement in the second half of fiscal 2010 is based on two things. The first is that we’ll be comparing against a weak half to June 2009 when

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Occupational saw a period of inventory de-stocking, which seems to be over. The second is our expectation that the stimulus packages of various governments around the world will have a positive impact.

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What assumptions regarding movements in your revenue and cost currencies and input costs underlie your EPS guidance range and what are the main risks to the forecast?

CFO Rustom Jilla

We have assumed that forex translation versus F’09 will be neutral – an assumption that looks conservative at this point in time. In addition, our F’10 hedging is evenly balanced across the halves and protects the downside while giving us more upside. At this time last year, we didn’t have sufficient revenue hedging in the second half and paid the price as the revenue currencies devalued much faster than our cost currencies. Input costs in F’10, including latex, butadiene and energy, are projected to be lower than in F’09.

The main risks to our guidance would be macro-economic: if consumer confidence and spending declines, if there’s a second cycle of credit de-leveraging and companies are forced into another round of job cuts – that would hurt Occupational sales. On the flip side, if the recession worsened or lasted longer than expected – it might result in a further reduction in raw material and energy prices.

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Gross profit after distribution expenses was US$338.6 million, a drop of US$45.4 million from the previous year. This was partly offset by a reduction of US$41.6 million in SG&A expenses to US$231.3 million. What ability do you have to continue cutting overheads if gross profit is further impacted by lower sales and pressure on prices?

CEO Doug Tough

SG&A costs were tightly controlled but we also benefited from forex translation in F’09. We’ve recently made significant cuts in our infrastructure and think our overhead levels are appropriate. Costs however, remain under review and if conditions worsen there are actions we can take and costs we could still cut.

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Your restructuring program in 2009 reduced manufacturing headcount by 4 percent, and you’ve flagged continued rationalisation in the current year. What ability will the business have to respond effectively when demand recovers? Will you be able to maintain the reduced cost base with higher levels of turnover?

CFO Rustom Jilla

We look forward to dealing with that challenge! We reacted quickly to the downturn – lowering our production and headcount to work off excess inventories and adjusting to lower Occupational activity. We have enough spare capacity and if demand accelerated we’d add more direct workers or overtime hours to respond. The answer to your second question is an unequivocal yes. We’d have a full year

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of F’10 savings from F’09’s structural cost reductions. If demand for our manufactured products increased we’d incur some incremental variable costs but higher output would reduce our average unit costs.

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Ansell’s Occupational business booked EBIT of US$53.6 million, down 32.4 percent, on sales of US$477.4 million, down 12.8 percent. Performance deteriorated in the second half, with EBIT down 58 percent to US$18.7 million on sales of US$215.7 million, down 26 percent. How is the business positioned in light of structural change in major demand sectors such as the US auto industry?

CEO Doug Tough

The softness in Occupational transcended auto; chemical industries were also affected, as were construction and white goods. We had diverted resources away from auto fairly early and re-deployed them elsewhere. We’re optimistic about what we’ve done to make inroads in sectors where traditionally our exposure is low, e.g. construction, but the reality is that these aren’t as large as the automotive or OEM equipment sectors.

We believe the Occupational business is well positioned but will have a smaller footprint for two to three years given the possibility that manufacturing won’t recover to past levels in that timeframe. In our two most affected markets, the Americas and Europe, we’ve therefore taken significant costs out of the business.

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The Professional business booked EBIT of US$40.3 million, up 26.7 percent on sales of US$332.2 million down 6.8 percent, and EBIT margin improved to 12.1 percent from 8.9 percent. This reflected favourable moves in input costs and product mix, and appears to have been driven largely out of Asia Pacific, your smallest market. Can you comment on the sustainability of growth and margins at these levels?

CFO Rustom Jilla

We had revenue and profit growth in Asia Pacific, where our strong Japanese business had a great year. But we also had good growth in European surgical glove volumes. Worldwide, we saw solid synthetic and powder-free surgical glove volume increases and powdered surgical volume declines, partly due to conversion. Exam volumes fell in the Americas as part of a planned rationalisation of lower margin products, helping our US business post EBIT gains. So we’ve emerged from fiscal 2009 with a better product mix, a good new product pipeline and the potential to benefit from lower natural rubber latex and butadiene prices. All in all, we expect to at least maintain our Professional margins.

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Ansell’s Consumer business booked EBIT of US$21.2 million, up 21.1 percent on sales of US$193.3 million, down 8.7 percent. EBIT margin was 11.0 percent, up from 8.3 percent. Nevertheless, EBIT growth slowed to 3 percent in the second half from 31 percent in the first half and margin dropped to 7.0 percent from 14.6 percent. What were the reasons for the relatively weaker profitability in the

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second half and to what extent are the second half results indicative of current performance?

CFO Rustom Jilla

We had expected the second half to be weaker: Jissbon had a superb first half with a surge in shipments ahead of an earlier Chinese New Year which then hurt the second half; Blowtex was impacted by currency movements and a rocky ramp-up in capacity with both sales and EBIT lower in the second half; there was heavy advertising as part of the US launch of the SKYN™ polyisoprene condom; and lower manufacturing utilisation due to delayed tenders.

The condom business often delivers fairly lumpy results by half. In fact – though the second half looks bad compared with the first – segment EBIT was up compared with F’08’s second half. Hopefully we’ll build on our recent market share gains in the US, and continue to rev up our Chinese and Brazilian condom engines.

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You’ve indicated that Unimil, the Polish condom business you acquired in January 2007, booked a smaller loss than the previous year. What further steps need to be taken to turn the business around and what is the expected time line for achieving profitability?

CEO Doug Tough

Unimil has continued to lose market share since we acquired it and our priority is to stabilise sales. We appointed a new leader for the business last year who’s been charged with channel and category management and we plan to introduce new products this year. Although we’ve taken strong action previously, Unimil’s cost structure will continue to remain under review.

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In spite of the drop in profit, Ansell’s free cash flow rose to US$121.5 million, up from US$79.8 million, partly reflecting a US$25.0 million reduction in working capital (excluding Hawkeye). What scope is there to further reduce working capital if demand remains relatively poor?

CFO Rustom Jilla

Our working capital days at the end of June were almost exactly in line with a year earlier. As you know, our Occupational inventories spiked in November and December and we reduced purchases and production from January onwards. We committed last February to working inventories down by F’09 year end and did so.

As the economy worsened, we stepped up our focus on receivables and the American and European teams in particular delivered steady improvement through the year. Our inventory and receivables metrics are probably as good as they can be given our current systems, supply chain and channels. We have a tight rein on working capital and if sales decline, the absolute dollar value tied up in working capital will fall … but not otherwise.

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CEO Doug Tough

We’ve also significantly increased the sensitivity of the organisation to the cost of capital. So the team is alert to controlling working capital because the cost of money is apparent to everybody and forecasts are getting scrutinised intensely.

We’re about to invest in a significantly enhanced enterprise resource planning (ERP) system and have benchmark numbers that suggest we should be able to further improve working capital over time once that’s installed.

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Free cash flow also benefited from a US$7.4 million fall in capex to US$14.0 million. Is annual capex at this level sufficient to maintain your assets going forward?

CFO Rustom Jilla

Yes. We’ve had several years of capital spending increases. We’ve always spent on environment, health and safety as required. We’ve increased capacity for key products: e.g. surgical and HyFlex gloves, closed old factories and built new lines. We’ve also taken condom lines out of Poland and moved them to Brazil and Thailand where they’ve been upgraded to be able to produce polyisoprene condoms.

We will probably run at this level of capex for plant and equipment, or slightly higher, in F’10. However, we have had a US$11 million investment this quarter to buy another 15 percent of Jissbon to take our ownership to 90 percent. We’ll also be spending north of US$15 million this year on the new ERP system Doug mentioned.

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Ansell had net debt of US$103.5 million at the end of June, down from US$133.3 million a year earlier. Net debt to net debt plus equity was 16.7 percent, down from 20.3 percent. In light of this balance sheet capacity, what is your attitude to growth by acquisition in the current environment?

CEO Doug Tough

People might argue that we’re overly disciplined or trying to be bottom feeders in our acquisition review process – I think that’s unfair. Last year we were uncertain about the economic outlook and concerned about buying into a falling market and that concern has proven to be well founded. We have an appetite for both organic growth and acquisitions, but our approach will be to remain disciplined and aligned to the best interests of our shareholders.

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Ansell announced an unfranked final dividend of A$0.16 per share, up from A$0.155 last year, bringing the full-year payment to A$0.28, up from A$0.265. What was the rationale for increasing the dividend amid a contraction in earnings and is it sustainable?

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CEO Doug Tough

It’s probably worth noting that our reported EPS in Australian dollars, the currency in which dividends are declared, was A$0.892, up from A$0.739 which is a 21 percent rise.

Last year was our sixth year of increasing dividends. This shows our commitment to sustaining a good return for our shareholders and our confidence in our cash generation and dividend paying ability.

Our hope would be to sustain this practice but with the level of uncertainty we’re experiencing, we can’t give any guarantees.

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Thank you Doug and Rustom.

For more information about Ansell, visit www.ansell.com or call David Graham on (+61 3) 9270 7215

For previous Open Briefings by Ansell, or to receive future Open Briefings by e- mail, visit www.corporatefile.com.au

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