Renowned gloves maker Ansell (ASX:ANN) has issued another warning about an earnings slowdown, attributing it to a surplus of unsold products resulting from the COVID-19 pandemic.
The excess inventory, including gloves and surgical items, has prompted distributors to reduce their orders, impacting Ansell's business.
The oversupply issue has also affected Ansell's division that manufactures protective gear for pharmaceutical and laboratory workers.
As a result, Ansell has intentionally decreased production and cautioned about an impending blow to its earnings.
"This shift happened very, very quickly," stated Ansell CEO Neil Salmon on Tuesday.
In response to the news, Ansell shares took a massive hit, plummeting by 14 percent during Tuesday's trading session, reaching $23.76, a decline of $4.01.
The company also indicated the possibility of job cuts among its workforce of 14,000 and the implementation of new technology systems to improve performance.
This development marks a significant turnaround for Ansell, which was once considered a market favourite during the peak of the pandemic.
At that time, demand for single-use medical gloves and surgical suits drove Ansell's shares up to $43.50.
According to the company's "underlying" figures, the earnings per share for the 2023 financial year are expected to fall within the range of $1.10 to $1.20.
However, in 2024, even after accounting for new investment costs, Ansell anticipates its underlying EPS to be between 92 cents and $1.12.
On a statutory basis, the projected EPS for 2024 is estimated to be between 57 cents and 77 cents, which falls short of expectations for the 2023 financial year, anticipated to range from $1.17 to $1.18.
As part of its plans for 2024, Ansell intends to streamline its organisational structure and reduce its manufacturing workforce due to declining production while increasing automation.
Additionally, the company will implement more enterprise resource planning software over the next three years, although Ansell declined to provide specific details.
UBS analyst Laura Sutcliffe expressed scepticism about the immediate impact of these changes, stating in a note to clients, "While these changes appear necessary to adapt to commercial realities, we are not yet convinced that they will provide the certainty the market seeks."
Ansell had previously warned about slowdowns affecting its business in the medical and life sciences sectors, with a decline in demand for single-use gloves and sterile garments and goggles.
The current pressure is now extending to surgical items.
According to Mr. Salmon, distributors had previously expressed concerns about potential product shortages. However, they abruptly transitioned from building up inventory to reducing it, indicating that they now have ample supply and are worried about economic conditions.
"We've observed this pattern in several different businesses at different stages of the cycle. The surgical business is the most recent one affected. However, we expect it, like the single-use gloves segment a year ago, to recover in the coming months," explained Mr. Salmon.
Ansell's healthcare division, which generated $1.19 billion in revenue during the 2022 financial year, experienced a decline to an estimated $900 million in revenue for 2023 due to excessive inventory accumulation over the past two years. The surgical items segment accounted for nearly one-third of the healthcare division's revenue.
Meanwhile, Ansell's industrial division, which produces gloves and chemical-protective clothing for various sectors such as mining and food production, generated $763 million in revenue in 2022. The revenue for 2023 is projected to be around $750 million.
Mr. Salmon reassured that the industrial division is not expected to face any significant recessionary impact.
Although Mr. Salmon expressed dissatisfaction with the company's short-term earnings trajectory, he affirmed his contentment with the underlying development of the business. He emphasised that the planned actions are vital for the company's long-term success.
Analysts have voiced concerns regarding potential complications arising from the implementation of the new IT system. However, Mr. Salmon highlighted Ansell's successful adoption of various new technologies across multiple sites over the past 18 months, which gives him confidence in their ability to execute further changes.
"I would not have made this commitment… if I hadn't gained a very high degree of confidence in our ability to execute, and not based on promise but based on track record," Mr. Salmon stated.
