Ansell Ltd

ASX:ANN

Earnings Call Analysis

Challenging Conditions, Modest Growth, and F '24 Outlook

Despite challenging market conditions and predicted recession not yet materializing, the company reported satisfactory earnings per share (EPS) at the low end of guidance, influenced by customer destocking and unfavorable foreign exchange rates. Revenue growth in Industrial reached 4.3% and surpassed 5% in Mechanical, with an incremental improvement in EBIT margins, particularly for Industrial in the second half of the year. Looking at a four-year period, there's been modest growth in key segments despite destocking phases. For fiscal year '24, the company forecasts EPS between $0.92 to $1.12, considering transformation costs, a $30 million Exam/Single Use price correction affecting the first half sales, and an inventory correction cost also influencing the first half. Additionally, a reduction in EBIT of $9 million due to exchange rates is expected, and the company plans to maintain its dividend policy and anticipates a $50 million share buyback program over the next 12 months.

The Shift in Demand and Adjustments in Strategy

In this earnings call, executives at Ansell provided a thorough look at the company's performance, acknowledging the impact of market changes and strategic adjustments. They highlighted safety and sustainability as key progress areas, showing year-on-year advancement in employee engagement and injury prevention. Despite a slight uptick in lost time injuries, there was a notable decline in total injuries, exemplifying the company's commitment to workplace safety. In the realm of sustainability, Ansell has made strides, with over 50% of their energy now coming from renewable sources and significant reduction in water consumption. All these factors lay the groundwork for achieving their 2030 and 2040 environmental goals.

Financial Outcomes Amid Market Challenges

Ansell's financial results reflected resilience amid a landscape of challenging market conditions. Industrial revenue growth was commendable at 4.3%, hinting at the company's ability to navigate mixed industrial sector performance. However, the healthcare segment saw destocking, leading to lower than expected sales. Despite this, Ansell managed to improve EBIT margins, particularly in Industrial, as their price increases aligned with input costs. Their key achievements included sustaining organic revenue growth in Industrial, improving margins, and a sequential rise in Exam/Single Use volumes.

Encouraging Results and Areas for Improvement

Ansell observed a particularly successful integration of Ringers, strengthening their position in the energy sector, and witnessed burgeoning growth in products for electrical protection, especially pertinent to electric vehicles. While the Chemical sector displayed consistent growth, it lacked margin improvement, thereby becoming a focal point for future productivity enhancements.

P&L Summary and Signposts for Future Strategy

The P&L summary delineated by CFO Zubair Javeed shone a light on the reduced top-line figures driven by normalization in Exam/Single Use pricing. Nonetheless, this normalization benefited GPADE margins, rising to nearly 31% in fiscal '23. SG&A expenses stayed relatively restrained despite rebounding customer-facing activities. Future targets for SG&A may challenge the 20-21% of sales ratio due to productivity initiatives and digital upgrades. The effective tax rate concluded the year just over 21%, with an expected higher rate in the fiscal year '24.

GBU Performance Analysis and Cost Dynamics

An analysis of Ansell's global business units revealed a sharp drop in revenue for Healthcare, influenced by destocking and currency fluctuations. However, the Industrial sector presented more favorable outcomes with over 4% constant currency growth. Cost trends were paradoxical; while savings were seen in raw materials, increases in employee and energy costs counterbalanced them. For fiscal '24, energy costs are expected to be lower, but no further substantial reduction in raw material costs is anticipated.

CapEx Allocation and Cash Flow

Capital expenditure focused significantly on the construction of the greenfield India surgical site and insourcing differentiated Exam/Single Use products. The target for CapEx in fiscal '24 ranges between $60 million to $80 million, which will also address some ESG goals. The cash conversion for the second half of the fiscal was 93%, though fell short of the full-year target due to the sharp destocking in Surgical and Life Sciences. Plans for inventory reductions in fiscal '24 present the prospect of improved cash conversion.

Balance Sheet Stability and Debt Profile

Ansell's balance sheet remained robust with low net debt levels. A slight uptick was seen following new leasing arrangements for a distribution facility in America. Despite shifts and uncertainties in the last couple of years, long-term value creation remains the core focus, with ample liquidity headroom ensuring resilience against interest rate fluctuations.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, and welcome to the Ansell Limited FY '23 Full Year Results Briefing. [Operator Instructions]

I would now like to hand the conference over to Mr. Neil Salmon, CEO. Please go ahead.

[Neil Salmon, Chief Executive Officer]

Thank you, and good morning or good evening, according to where in the world you are. Thank you for your interest and for joining this conference call today. If I start with an overview of the matters that we'll cover, I'll give you a shorter than usual business update as much of the headlines are already in the public domain, then hand over to Zubair, who will cover the financial results. And then I'll have a slightly longer than usual conclusion section in which I'll aim to put Ansell today in the context of the last few years and look ahead with the productivity investment program that we recently announced.

So, let me now start with that business update and always, of course, we begin with safety and sustainability. Another very successful year, showing significant year-on-year progress in both our leading indicators and also our injury statistics. The leading indicators largely measure how engaged employees are in making observations of unsafe conditions at work and thus preventing future injuries. And you can see generally an increase in the various tracking mechanisms we use of for example, unsafe acts reported. Injury statistics, we see a slight increase in lost time injuries, but against an already very low level and a substantial reduction in medical treatment injuries against a prior year that was -- the prior year was already a record low. So, we set a new record and overall, about a 30% reduction in total injuries.

Moving forward to sustainability. On the left-hand side of the slide summarizes the progress we're making against our people agenda. Within our own operations, we continue to ensure that there is no legacy of recruitment fees through our current population that was completed several years ago. But more recently, we've reached out to former workers of Ansell that we were not able to contact originally through social media and other channels. And where we have been able to identify former employees, we have also completed remediation of fees they paid.

With regards to our audit protocols, we now have included enhanced audits covering Forced Labor Indicators that are more comprehensive and intensive audit process, and we're seeing some good results from those in our internal facilities. And then very important is the establishment of independent grievance mechanisms now in place at 6 of our sites and to be progressively rolled out across our entire population.

Commenting on our third-party supply chain. So, as I announced earlier in the year, a very important milestone in that all our Malaysian finished goods suppliers confirmed and we have verified that they've completed their own recruitment fee reimbursement, a substantial sum of money to the benefit of tens of thousands of workers. We have also asked our key wave 1 suppliers to incorporate Forced Labor Indicators to their audits as well. And we've extended our supply management framework now beyond the first wave of finished goods suppliers and strategic raw material suppliers out to other suppliers, for example, packaging, services and so forth. And as we do so, we realize that there continue to be issues that need to be addressed across the broader supply chains, which we benefit from. But I'm pleased with the progress that we are making.

And that can be summarized overall and generally, a much improved closeout of audit issues, both internally and with our third-party suppliers. The right of this page summarizes our key environmental goals, and I'm pleased to say that against all 3 of these, we are on track at this point in time. Although admittedly, some of the reduction in emissions and water consumption this year was also a function of lower production volumes. But more importantly, we are on track against the underlying investments that will take us to that 2030 and 2040 goal.

So electricity, for example, was 2% just a couple of years ago, sourced from renewables, now up to 29%. And overall, including the use of biomass, over 50% of our energy is from new renewables. Important progress in water withdrawals. We're investing in sophisticated reverse osmosis technology. We have a ways to go before we have fully optimized that and that will be a key focus for the next 12 months. And then zero waste to landfill all the Ansell facilities in the original scope of this project are now zero waste to landfill, which is a huge accomplishment across thousands of different items. Two have not yet been certified, but the certification process is well underway, and we're confident they will be. And now we're adding in our 2 more recent facilities being Careplus, now known as Ansell Seremban and our under construction facility in India.

So, turning to financial progress and outcomes. So, the external environment I've commented on already. We see strength in key industrial verticals. It is a bit of a mixed picture in industrial, both geographically and market by market. But overall, we continue to find ways to grow and I expect that to continue for the next 12 months and we do not yet see the onset of recessionary conditions that have been long predicted. The key factor affecting top line growth in healthcare is customer destocking and I'll comment on that further in a moment. And then foreign exchange rates were also a headwind in fiscal '23 and we expect that to worsen in fiscal '24.

So overall, I think it was satisfactory that we delivered EPS at the low end of our original guidance range in what turned out to be more challenging market conditions than we had forecast at the beginning of the year. I'm pleased with the overall organic revenue growth for Industrial of 4.3% and above 5%, as you'll see in a moment for Mechanical. And yes, we did see lower sales from destocking in Healthcare. But if you look through those to the end user demand, as reported by our distributors, you see a more positive picture.

Overall, EBIT margins improved and in particular, Industrial margins improved in the second half, which takes me to the bottom left part of this page. These were the key goals I set and announced to you 6 months ago. We achieved all of these. We continued organic revenue growth in Industrial. We improved Industrial margins, as the price increases we had communicated came through fully. And so our selling prices and input prices came back into sync. And we also saw encouragingly a strong sequential improvement in Exam/Single Use volumes in the second half versus the first half. The one piece of this, although we predicted, but of bigger magnitude than expected was destocking in surgical end user demand, and that's what took us to the low end of the guidance range, offset by incentive reversals.

And then middle right or middle bottom of the page, I should say, we continue our program of investment behind long-term growth and value creation opportunity, and I'll comment more on that in a moment. So, let me now go through our SBU highlights in a little more detail before I hand over to Zubair.

So, Exam/Single Use, yes, down almost 30% year-on-year. But note that over the 4-year time period that we're highlighting here, revenue up 2%. Now volumes were down in that comparative period. Revenue, therefore, is up on mix improvements in the business and also on some remaining favorable pricing. But in particular, if I look at that strong sequential improvement in volumes in Exam/Single Use, we see signs that this business is emerging from its destocking phase and overall, a stronger mix and portfolio than we had prior to the pandemic.

This, coupled with our investment program in Thailand and now through the acquisition of our Careplus joint venture, means we're approaching 40% of volume produced in-house and we'll get that close to 50% volume in the next 12 months. Revenue higher than that because generally, the pricing is higher on our more differentiated in-house produced styles. 4 years ago, we only made 1 of our top 10 styles in-house. Now we make the majority, 7 to 8 of our top 10 styles in-house. So that's a significant change in the makeup of this business.

Surgical, a disappointing last 6 months. We had strong revenue growth in the first half and a decline in the second half, resulting in an overall moderate net decline in the 12-month period. But note, the 8% growth over this full year period, indicating a business that has performed well despite being currently dampened by destocking effects. Encouragingly, our position with this business globally, which sets us apart versus all other players in this space continues to give us opportunities to grow. So, we saw good double-digit growth in Asia Pacific, particularly 20% growth in India. And also, we continue to see the general trend shift towards more differentiated synthetic styles and away from natural rubber latex.

Life Science here a similar picture to Exam/Single Use in the year-over-year effect, again, largely of destocking, but also some end-user demand impacts as vaccine production, for example, was not so apparent in the year versus the prior year. But against the 4-year time period, also a good compound annual growth rate for Life Science. This is a business we continue to invest in, we continue to believe has long-term higher growth rate potential.

Turning now to Industrial. And here's the Mechanical 5% growth rate in the year that I commented on. I'm very satisfied with this result, especially as Mechanical also had some destocking effects in more -- with specific customers and specific verticals, but it had to overcome in the year. That 3% compound annual growth rate is within the range of the long-term growth rates that we said we anticipate for Mechanical, but at the lower end of that range. And I think our more recent performance suggests indeed, we can do better than that rate going forward.

Very encouraging to see the success of new products, to see the success of our Ringers integration, which gives us a strong position in energy, the energy vertical. And we also see double-digit growth in products designed for electrical protection, electrical vehicle production, for example, and also other -- other markets where electrical protection is required, and we're innovating in this Phase 2.

Chemical, more consistent story here. The chemical body protection, if you remember, was another product range that saw elevated demand during the pandemic. That corrected the most quickly of all our SBUs. And so this business was out of that phase in this period. And so you see a fairly steady growth rate in the 12 month and over the 4 years. While Mechanical margins have improved over this time period as a result of investments that we've made, Chemical margins have not improved. And so this is an area of focus for us going forward and linked to our productivity investment program.

So now, let me hand over to Zubair to run through the financial summary, and then I'll take it back with some strategic comments at the end.

[Zubair Javeed, Chief Financial Officer]

Thanks, Neil, and hello, everybody, and thanks for joining the call. So, I'll begin as usual with highlighting a few key items here in the P&L summary on Slide 11.

So, beginning with that sales decline year-over-year of nearly $300 million. Of course, that was largely driven by that pricing normalization in the Exam/Single Use business. And at the same time, the cost of purchasing that product from our outsourced partners, obviously, also proportionately declined. And so overall, there's a benefit to GPADE margins. And as you can see here at the group level, we've moved from just under 29% GPADE in fiscal '22 to nearly 31% in fiscal '23. Now we're very focused on continued improvement in these margins, but pricing comparisons against the first half of fiscal '23 in that Exam business is going to negatively affect our sales growth. And from the second half, however, I think we target to be back in positive territory and that's given the volume trends highlighted just now.

And Neil has already covered, of course, the other key points regarding revenue, so I'll move to this SG&A line. And in that regard, we've always planned for some growth as our in-person customer-facing activities are reverted to more usual levels, but the increase in SG&A has been muted by incentive expenses being a lot lower than the targeted spend. Of course, we highlighted this in the earnings call in July. And as promised then, we've disclosed additional detail in Slide 34 to help clarify the various parts of that incentive unwind.

And because of that lower expense, SG&A as a percentage of sales at just over 18%. Although, it's considerably higher than fiscal '22, as you can see here, it's still lower than we'd usually expect. I mean past calls, I've mentioned target SG&A levels could be anywhere between 20% to 21% of sales. And all those sorts of percentages are still reasonable, we'll challenge these ratios through our accelerated productivity program and digital initiatives and Neil is going to describe more about that shortly.

And then the last thing I would note here in terms of the P&L is the effective tax rate, which closed the year at just over 21%. At the half year, I did outline although we had a steep increase in the Sri Lanka corporate tax rate, we benefited from using unbooked tax losses, we've built up in our Australian entity against FX hedge contract gains. Now absent that size of benefit, we're tracking to a higher effective tax rate and that's going to be expected to move all the way across fiscal '24.

Now in the next couple of slides, I'll talk to the global business unit performance, beginning here with the Healthcare business unit on Slide 12. You can see the full effect of that Exam/Single Use pricing coming off from the top line as well as destocking in both Surgical and Life Sciences. Also of note, is nearly $50 million of unfavorability, driven by FX and our exit from Russia. And with that sort of sales reduction, it's no surprise to see a commensurate drop there in EBIT dollars. Now that said, constant currency EBIT margins, in fact, showed 80 basis points of improvement because of that pricing normalization in the Exam business, as I've just mentioned.

Turning to the Industrial business unit. Here, a much better top line story with just over 4% constant currency growth. And as highlighted by Neil, the Mechanical business unit, it's delivering good growth. We're pleased with the new product introductions and both Mechanical and Chemical business units enjoying the benefit of favorable pricing and mix. Now in constant currency terms, EBIT grew double digits, although on a reported basis, the Industrial GBU was also impacted by that Russia exit and unfavorable FX. Without those items, the EBIT margins grew 120 basis points and we think that provides a really good base going forward as we look to accelerate productivity initiatives, which, again, Neil is going to describe very shortly.

The next slide is our usual cost summary. Overall, it's been a mixed bag in terms of our cost picture. We've experienced double-digit reductions in the cost of natural rubber latex and NBR costs versus fiscal '22. But to a large extent, those savings were offset by higher employee costs at a couple of our larger manufacturing sites and that was together with increased energy costs in Malaysia and Sri Lanka. As we look out into fiscal '24, I don't expect further significant reductions in NRL and NBR cost. But at the same time, we are planning for lower energy costs with trends in the second half of fiscal '22 -- or sorry, fiscal '23 supporting my assumptions there. And lastly, in terms of cost, I'm just reconfirming here that the Exam/Single Use outsourced product costs now remain stable and somewhat predictable compared to the last couple of years.

In terms of capital expenditure, turning to Slide 15. Here, you'll notice that we spent just under $70 million with a large portion of that going into the greenfield India surgical site. At the same time, further in-sourcing of some of our differentiated Exam/Single Use products is also included in the $70 million of spend. For fiscal '24, we're targeting CapEx to be in the $60 million to $80 million range, and this will include spend to realize some of our ESG ambition and it's obviously, with continued progress with the greenfield site there in India.

We've also recently established a brand-new distribution facility in North America and fitting that out will incur some CapEx in fiscal '24. Now although, this is still elevated spend versus our history, I've said this many times, when we reinvest in ourselves, we do yield the best returns in our overall deployment of capital, and therefore, we've continued to encourage our teams and ourselves to look for innovative ways to drive further automation and support sales growth.

Moving to the cash flow slide, Slide 16, following our H1 results, I did say that we would be targeting a much better H2 cash picture. And we did realize some of that goal with a 93% cash conversion. But at the same time, I did say I'd be disappointed if we didn't close out the full year in the 90% plus range. Clearly, we fell shy of that ambition, but a result of that sharp destocking we enjoyed in Surgical and Life Sciences. Now preparing for the slowdown in production in fiscal '24, which we spoke to in the July call as well, also drove a significant reduction in trade payables in the fourth quarter. So -- and of course, that consumes working capital. Now given our inventory reduction plans for fiscal '24, I also target for this significant capital -- working capital unwind and corresponding cash inflow in the next 12 months or so.

Turning to the balance sheet. So, despite all the noise in the last 2 years in this industry, the one constant signal is our strong balance sheet. And as you can see here, even following those capacity investments and the somewhat bumpy sales trajectory, we continue to operate with relatively low levels of net debt. And here, you can see we've only just ticked up above that 1 turn of net debt to EBITDA and that's following the new leasing arrangements we've got for that new warehouse facility in America I just mentioned a few moments ago. Also of note on this slide is the working capital movement. We've driven down nearly $70 million of inventory since the half 1 results. At the same time, we have that offsetting reduction in trade payables I just mentioned.

And then lastly, of note on this slide, we closed the year with pretax ROCE at 11%. And that's not surprising -- surprisingly down on fiscal '22, given we have lower EBIT and lower and higher capital employed. Now the multiyear expansion of that capacity to support the growth in our premium and differentiated productive lines is inevitably going to create a temporary drag on ROCE. And we plan for that, but we do target increased returns in the mid-term as we're going to leverage that newly installed capacity and our EBIT will benefit from the productivity programs.

And wrapping up this financial section, I'll give a brief overview of our debt profile. And again, consistent with my comments at the half year, we continue to operate the business with plenty of headroom in terms of liquidity and as called out on this slide, we have $100 million of senior notes maturing in the next few months, but these will be more than covered by our undrawn facilities. And also of note, I'd say here, most of our gross debt is with fixed interest rates. And so we do have some protection against the current swings in the macro interest rate environment and who knows where that's heading.

So in summary, quite a few moving parts, both internally and externally. We've been managing that for 1, 2 years now, but we'll continue, again, to manage this business with a keen eye on long-term value creation.

And with that said, I'll hand back to Neil, who can describe more about what that means.

[Neil Salmon, Chief Executive Officer]

Thank you, Zubair. So, let me turn now to this next section. So I realize, as you look -- try to model the business over the last few years, it's hard to see the underlying trends of the business. In 2020 and 2021, we had a period of acute demand for infection control products and price increases, particularly for Exam/Single Use, also a period of manufacturing and supply chain disruption affecting us and our customers and which led to customers running very cautious levels of inventory. And so some of this demand in this period was actually going into inventory rather than supplying end-use demand, but that was difficult to see at that time.

And then in the 2022-'23 period, we see the opposite of those effects. So end-use demand came down more quickly than our distributors had forecast, leading to some overshoot in their inventory levels. And then since then, we've been in this destocking phase, which has been working through our businesses at different rates. So Chemical, as I mentioned, was the earliest to exit that phase. Encouragingly, Exam/Single Use now seems to be at the end of that phase. But I now realize there is longer to go for Surgical and Life Science. And I'm not expecting those businesses to be through the destocking phase for another 6 to 9 months.

In the '22-'23, we see the Exam/Single Use price reset. And as we're very clear in this presentation, there's another $30 million to go comparing fiscal '24 to '23. But note, those are prices that are already in the market today. On a sequential basis, we now see Exam/Single Use pricing relatively stable and we expect that to continue into next year. But given the last big price reduction was 6 months ago, the first half of next year will be affected by that.

As you're aware, we have fully exited our Russian operations. I think one of very few multinationals to have completed the exit. I'm very happy we did that quickly and effectively, given the reports I read of other companies who are in a difficult situation right now. And then foreign exchange has been a headwind in the last 12 months and will be again in the next 12 months. Even if underlying rates improve from here, our hedge book now largely locks in the outcome for the next 12 months. And as Zubair has highlighted, we see increases in interest and tax rates.

So, what I'll now try to do is step back from these shorter-term trends and give you a picture of Ansell today versus prior pre -- the pandemic. Talking to organic growth, first of all. So, I showed you those 4-year organic growth rates, all 5 of our business units have achieved positive organic growth rates since F '19, even though I'm using a comparator period that is dampened by destocking. Also, important that the Exam/Single Use business and the Mechanical business, our 2 largest SBUs have improved the underlying quality of their businesses through mix enhancement, new product innovation, particularly in Mechanical and also the benefits of our prior restructuring program, Project Horizon, which has resulted in long-term and sustained improvement in Mechanical margins.

During this period, we've remained very focused on our pre-existing and long-term investment program. We have not been distracted or chased after pandemic demand or even what we viewed as temporary fashions, for example, the near-shoring trend, which, while it may have some traction, I think it's going to be much more limited than many predicted. We stayed focused on investments that we think are for the long-term benefit of our customers and our shareholders. I'll briefly mention them here and then go through in a little more detail.

So emerging markets, continued product innovation and now adding sustainable products to that focus. Manufacturing capacity in our most differentiated styles in which we've seen multi-years of above-average growth. And very importantly, perhaps I haven't stated this enough, improvements in the underlying supply chain planning and digital system capabilities of the business, which are fundamental to our ability to meet that to satisfy our customers.

So, when I look forward over the next 12 months, clearly, the EPS figures that I've already trailed to the market are nothing to get excited about for the next 12 months. But going into F '25, we do see the headwinds I've already commented on normalizing, those that I can see today that is at least. And so I do believe now is the right time to position Ansell for the next phase of growth, and that's the reason why we have announced and why we are starting to implement our accelerated productivity investment program, which is targeting significant long-term value creation for our shareholders.

So, now let me go through each of those in areas of investment focus and give you an update. Emerging markets, in the last 12 months, sales largely level year-on-year. Of course, that's an overperformance against the overall business. And so we've seen another further significant step up in emerging markets as a percent of the total, now approaching 25%. And if you look at the 4-year growth rate, then you see double-digit growth in emerging markets. It's been a mixed picture over the last 12 months.

Weakness in China has been widely reported and commented upon. And indeed, we did see that in both our Industrial and Healthcare businesses. But we saw great results in Latin America, another year of solid growth there. And within India, the -- our medical business is doing well, as I previously mentioned. So overall, there is no one else in the industry with the geographic diversity that Ansell has in either the Industrial or the healthcare portfolios and that continues to be to our advantage going forward, and we continue to invest behind our effectiveness in these markets.

Turning to innovation. The one aspect of SG&A that has consistently grown ahead of inflation is our spend on R&D, a 10% growth rate over this period. And we see some really encouraging results. Particularly in Mechanical, the products on the top middle left there, 11-561, is one of a family of ultra-lightweight high cut products that are getting great reviews from customers. We're launching subsequent products in the range now. And each time we bring one of these to markets, we get very strong customer feedback and the challenge is how do we keep up with demand through ramping up production of what are quite specialist styles. We are the only ones with this polyisoprene hybrid technology for Surgical. And now we have introduced it in a micro thin form, again, a product that's getting good response from customers.

Our Chemical business is extending into thermal protection and that's really the core of innovation in Chemical, multi-risk protection, how do we combine cut and chemical cold and chemical because those are multi-use products that allow customers to get rid of many products or workers having to wear many products as they do today. And then 94-242 is the first genuinely new product we've launched in Exam/Single Use for a while because that business was not able to launch products while it was dealing with the pandemic era. There's a great story in the annual report about how Emirates Airlines is using 94-242 to paint planes. Would you have known that an Exam/Single Use product is pretty critical to the safety of the worker and the quality of the paint job as Emirates repaints its entire fleet. So, some great examples of innovation driving differentiation across all our businesses.

Perhaps the most -- the smallest but perhaps most significant here is our Inteliforz range. This, you may remember our connected PPE, where we use a variety of devices and sensors and the fundamental objective here is to warn workers of injury risk before an actual injury event happens. We have now our first customer subscriptions. The revenue from those remains small, but it's encouraging. And as a result of the leading work we're doing here, we're unlocking multimillion-dollar opportunities across our existing portfolio. And that's really the key to Ansell going forward. Nobody else has the portfolio we have and the ability to unlock value at the end user level and that's driving a lot of the focus that I'll talk about as we reposition the company going forward.

The biggest area of investment in terms of dollars has been in our manufacturing assets and these you are mostly familiar with. We continue to build out our greenfield facility in India. We acquired our wholly-owned -- we took Careplus wholly-owned 6 months ago, now renamed Ansell Seremban. This facility is doing great for us. It's productivity and yields have improved as we predicted and we are now introducing that technology to the site that we didn't want to do when it was a joint venture site. It's one of very few facilities in Malaysia today producing these products that's running at a very healthy utilization rate. And that talks to the differentiation of this portfolio.

And then we continue to work through the expansion of our Thailand facility. The lines are running, but there's more work to do before we achieve the cost targets that we set for these lines. And on the right are the investments that while smaller in dollars are just as fundamental in capability in our systems and processes. We have overhauled our entire supply chain planning processes, systems and also brought in a number of very talented players who are creating leading capability in this area.

And this begins, yes, with the ability to predict. Customer demand is something that we have clearly struggled with over the last 12 months. Working with distributors to model their sell-out their inventory levels and to better anticipate moves in the market. This is generating significant improvement in customer satisfaction metrics. We use as many companies do the Net Promoter Score and we've seen that improve substantially over the last 2 years as a result of these changes.

And then although I've only recently announced our ERP program for our commercial units, this program has long been underway for our manufacturing units. And we've seen in the last 12 months, thousands of manufacturing employees move from 30, 40-year-old ERP technology to the very latest cloud systems. And what's most important for you to know is that, that went live, all those go-lives have happened without a hitch. We have a very good team who's very practiced in implementing the system and we're seeing great results and it's now unlocking part of our productivity opportunity for manufacturing.

And then finally, we've entirely overhauled, added new and replaced old e-commerce systems, which interface with customers in various ways, portals that allow distributors, visibility on where their product is, orders unfulfilled and so forth, building out our presence on e-commerce. That part of the business is still small, but it's growing at a healthy rate and also creating the potential to supply very targeted customers that are not supplied or not served by our existing channels through direct sales on Ansell. But that's probably the smallest of these investments. The other 2 are the more significant to our growth going forward.

So, with so much progress in these areas, how does it stack up that F '24 EPS that I've given you an indication of already will be below our adjusted F '19 EPS. Well, these are the headwinds shown in a bridge that explains that. So firstly, a significant FX headwind comparing '24 to '19. I do expect in time, this will reverse. But the earliest that it can do so because of the hedge position we now have will be in F '25. These other impacts will not reverse. So, we've lost the earnings of our Russia business that was highly profitable on an incremental basis. We see higher interest rates impacting interest cost on debt and the investments we've made in CapEx and also temporarily in working capital, meaning we have a lower net cash and gross debt and higher gross debt position.

Tax rate is expected to go up into next year and a moderate offset from our share buyback program. So, if I adjust for all of these, we do see EPS higher comparing '24 to '19, a moderate rate of growth, certainly below our ambitions for this business. But I think important still to state that after making these adjustments, our F '24 EPS will be moderately higher than our F '19 EPS. But we need to do something about these headwinds to the business rather than just accept them as they are. And we also need to really position Ansell now to take full advantage of the investments we've made. And those are the drivers behind this productivity investment program that I announced a couple of weeks ago.

So, 3 main areas of focus. Simplify and streamline our organization structure. We've had quite a complex metric structure over the last few years, which has achieved significant results in terms of repositioning Ansell as a leading innovator, substantial work clearing up our branding position and consolidating to a set of global leading brands and also driving key strategic initiatives. But it was a complex structure. And we knew that after we had achieved those goals, it was time to put the focus of the organization structure back on the customer. And that is fundamentally the change we're making here; focus on the customer, organize back from the customer and reduce a lot of duplication and overlapping responsibility that the previous structure entailed.

So, if we get this right, this more significant benefit of the new structure will be an enhanced ability to execute in the market, which, of course, means a higher growth rate. But the immediate benefit will be lower SG&A. We expect those benefits to begin this year and then be in full effect next year. Manufacturing productivity, so we've seen good results in the last 12 months from our automation program. We've had one of the highest rates of manning improvements through putting automation steps in place, particularly in packaging operations. So, now we want to step up our ambition. But we also needed to reduce our manning levels appropriate to the slowdown in production that I'll comment on a moment that will allow us to rebalance our own in-house inventory in the way our customers have already done.

The goal is that once production volumes improve as our destocking phase is over, the automation investments we've made will mean we don't have to rehire and we can run our facilities fundamentally at a lower manning level into the future. And we continue to pursue our multi-step make versus buy or in-sourcing, outsourcing program. I've commented already on the success of in-sourcing in the exam single-use business. In some other parts of our business, we're clear that there are products where there is no Ansell differentiation and where third parties have greater economies of scale for us -- than us in those products. And so in some cases, we will proactively outsource to reduce costs and then rationalize any assets that are remaining at Ansell that are not competitive with global standards. So, it's a multi-step in-sourcing and outsourcing strategy, both steps designed to create value for customers and shareholders.

And then finally, the IT program here. With the confidence that we rightly claim through success over the last couple of years, we're stepping up our ambition here. And in particular, over the next 2 to 3 years, we'll bring our commercial units all on to the same digital cloud-based ERP platform that is already proving successful in our manufacturing operations. At the same time, but independent to these decisions, we have decided that we need to proactively reduce Ansell inventory, and that means reducing our rates of production. In the short term, that creates headwinds. And coincidentally, the headwind cost of lower rates of production more or less offset the benefits of savings from the productivity program over the next 12 months. But of course, we only expect a 1-year effect of slower production and so that will normalize going forward. But overall, the inventory reduction should fully pay for this program.

So, let me summarize the financials here. The overall pretax cash cost over 3 years, we estimate around $40 million to $50 million, and we expect the same amount of savings once we're at full annual run rates, which should be in F '26, around $45 million. The second component is the IT spend. Now in years gone by, this would have been a CapEx item. But with the change to accounting standards, we now need to expense it. And so that's why I wanted to call it out for you today so that you see it going through as an expense item. But here, I have not yet signed off on the business case for this. I'm confident there will be a good return, probably more limited than the return on the cost reduction above is usually the case for IT investments, but nevertheless, a return. And as soon as we have that business case approved, I will update you, I would expect probably at our half year results in February.

The P&L impact similar to the cash impact, there's only a moderate amount of noncash charges to the P&L to facilitate these changes. And then you can see the '24 effect of productivity of savings on the right side here being offset by that temporary headwind from the inventory reduction. So overall, I believe this is the program needed to power Ansell's EPS growth to the future. For the reasons I've explained here, we'll not see a net benefit in F '24, but in F '25 and beyond, we want to get EPS growing again. We want to get shareholders seeing value creation.

So, let me conclude now with focusing my lens on F '24. And these numbers, the EPS range here is as announced to the market in July. So, the EPS range after excluding transformation costs at $0.92 to $1.12. Sales trends as guided in July update. And as I've mentioned, note that, that $30 million remaining Exam/Single Use price correction will affect first half on first half sales. Also note that the inventory correction cost effect will be largely a first half effect. F '23 earnings were protected by the hedge book that we had in place 12 months ago. Those hedges have rolled off and being replaced by hedges at current rates. And so we will see the full effect of, in fact, last year's exchange rates in F '24, and that will reduce EBIT by $9 million we estimate.

We've talked about the normalization of incentive costs, assume we pay closer to target levels in F '24. And we talked about the higher tax rate and the higher interest cost. And then to summarize the CapEx program. I do expect these investments to generate long-term growth and value for shareholders. We're probably in our final year at this elevated rate of spend as -- and the biggest individual chunk continues to be on our India surgical facility, which will ramp down in years after this.

Our dividend policy is maintained. We'll continue to pay out at that 40% to 50% rate and on earnings prior to transformation costs. As you know, we've had an active capital management program for many years. We continue to look for active deployment of capital. And based on how we see the opportunity for investment right now, I do expect an elevated rate of share buyback. And so I'm indicating, of course, subject to market conditions and our ability to complete the program that we should be targeting around a buyback of about $50 million over the course of these next 12 months.

So, let me wrap this up and then we'll go to questions. Fundamentally, on the left, we believe we see favorable end-use demand, but I accept that it's difficult to see in our reported sales and that's largely because of destocking in the Healthcare GBU. On the right, we continue to stay focused on long-term investments. The programs well underway will now be augmented by our accelerated productivity investment that is designed to build a platform for superior growth, also lower cost. And of course, those 2 together mean superior returns. And with those 2 elements in place, then remember our global leadership position, unmatched by anyone else in our industrial or healthcare positions in growing differentiated market segments. That's the core value of Ansell and now we need to see it come through in the next phase of growth for the company.

Thank you for listening. And now, let's go to questions.

[Operator]

[Operator Instructions] Your first question comes from David Low from JPMorgan.

[David Low, JPMorgan]

Could we just start with the incentive program. Thank you for the additional information on Slide 34. Just would like to understand, of that $56 million in FY '23, one, what's it sensitive to? So, if we're modeling in sales or EBIT, it comes in above or below, how do we sort of estimate how much of an impact we should see in that incentive program line? And just in the same vein, FY '24, it looks like there's still a little bit of a reduction there from the non-repeating reversal of prior year accruals. Can I get some clarity on that, too, please?

[Neil Salmon, Chief Executive Officer]

So generally, so we have the short term, we have the sales program, which is relatively small. We wouldn't normally call that out, but we wanted to give the overall picture. And then we have the short-term incentive and the long-term incentive program. So generally, we set the short-term incentive program consistent with our guidance to the market each year. And so of course, if we're trending ahead, then incentives will increase, but that will be the net effect because we have to pay for those incentives through improved earnings results and the opposite effect happens. So, it's not a precise math formula that says at the low end of our guidance range, you would expect to see limited or threshold level short-term incentives. But usually, that is how it will work out.

Long-term incentives are set on a 3-year time horizon. The metrics used vary somewhat, but the 2 most important are EPS growth and ROCE. But this is where it becomes a little more difficult to model because, for example, the EPS growth rate in the most recent program that vested in F '23, we actually achieved a decent EPS growth rate on an organic constant currency basis, but we failed the ROCE gate that was put in place for that plan. And so that plan did not pay at all this year. And we -- the reason for the major adjustment in F '23 is because we now estimate that the plans vesting next year and the year after also will not pay. Those plans were set during pandemic era with higher base EPS. And it seems unlikely that we'll be able to recover the business quickly enough to get back to -- to get back above target threshold. So that's what's unusual in F '23.

We've had the normal but still not wanted, of course, a reversal of STI expense, which is within the year item. But then we've also had a take back of provisions previously made on plans vesting this year, next year and the year after for long-term incentives. So yes, there is still some accruals remaining on those and we'll give you further updates, but they're relatively limited versus the numbers that we've talked to at this time. So, I hope that gives you a satisfactory explanation there, David.

[David Low, JPMorgan]

Yes. Just to clarify then, so $56 million in FY '23 and 80% of that is the short-term incentives and they should line up reasonably well with the guidance program. Are we talking, 0 at the bottom end?

[Neil Salmon, Chief Executive Officer]

It's not, as I said, it varies. So, we guide EPS. These metrics are set with on EBIT. So, there's always some difference there. There's also revenue as usually, it wasn't in the last 12 months, but it's often a measure. So that's not -- it's not back that's not the formula, but you will see a correlation certainly between where EPS is in the range and the amount of short-term incentive that's paid.

[David Low, JPMorgan]

I think just as such a swing factor, it's helpful to have it called out. One other topic quickly, maybe for Zubair, just on the FY '24 cash flow, you said it was going to be better. What sort of cash conversion are you expecting in '24?

[Zubair Javeed, Chief Financial Officer]

Yes. So long, we came down on that, David. But of course, with the working capital unwind I would expect it to be north of the 90% I was targeting this year, but more to come on that. And you’ve seen, David, we’ve announced a continuation of our buyback program, which is pretty significant as well. So, when you wrap all that together, yes, I’m pretty bullish on the cash conversion going into next year.

[Operator]

Your next question is from Sean Laaman from Morgan Stanley.

[Sean Laaman, Morgan Stanley]

You've called out, I think, the $30 million [heat] in the first half from price reductions observed or implemented 6 months ago, I think I heard correctly. And then you're also calling out, I think, another 6 to 9 months potential of destocking to occur. Now in line with that, you've also talked about investing and observing some improvements in supply chain planning. Can you help me sort of tee up the 2 things and say, specifically might have what happened in the improved supply chain planning that gives -- might give investors confidence that you've got a good less or around the impact of price reductions and the destocking going forward.

[Neil Salmon, Chief Executive Officer]

Yes. So, the main -- we measure 2 metrics that -- well, measure 3 metrics actually that give us a read on whether our -- the investment that we've made in systems, but also processing people is delivering results. The first 2 are internal measures, Ship to Promise. So that means every time we commit to a customer that they're going to get a certain amount of product by a certain date. Do we hit the promise that we've made. I won't give you the prior year metric because it was embarrassing, frankly. I can tell you that we exited the well above 90% and that's a substantial improvement. So now, more than 9 out of 10 deliveries arrive exactly when we say, of course, we want that to be -- so that it's a true exception but it doesn't arrive as we promise, but substantial progress. So that's the first metric.

The second is forecast accuracy. So, when we set a demand plan and we look 3 months ahead, how accurate are we. And this is at the SKU warehouse level. So, Ansell has something like 20,000 SKUs across something like 12 major warehouses globally. So very, very complex data sets. And our goal here is to get to 60% forecast accuracy 3 months out, but also to consistently be neither over forecasting nor under forecasting. And those 2 metrics and we've only tracked them for a shorter period of time, we didn't have the data to track them before, but they also exceeded or met our improvement goals over the last 12 months. And I think now benchmark very well against what you see other players.

But as I mentioned, the real asset test of this is do customers notice a difference. And this is where the Net Promoter Score comes in. And then also many customers have their own methods of measuring our fulfillment rates, particularly in the U.S. And many customers are reporting to us that we're now a top quartile performer and it's a long time since they've seen Ansell perform as well. Frankly, for years, this was never really a core strength of ours. And we assumed we could win just through the strength of our product, but availability was not a core strength. That was not the right formula before and so we put a real focus because if customers make the decision to go for an advanced set of protective equipment that Ansell offers, then we want to make sure they never have a reason to revisit that decision. So supply chain reliability is key to the stable base of the business, ensuring that new wins are always on top of that stable base.

So, those are some of the metrics that I can share with you, Sean, that do indicate improvement. I would -- there's another metric that I don't have a precise read on, but it's what percentage of our customers do we have collaborative forecasting with, which means those customers are now sharing their sell-out data, that's pretty good. More -- the next level is they're sharing their inventory levels. Only a few customers today are willing to do that. But of course, if they don't share that with us precisely, we can still model it through looking at different trends. That's really new in the last 12 months. We've never used that data in the sophisticated rigorous fashion that we are doing today. And that, I hope, will give me a better ability to predict these inventory change factors that are so significant in the short term as our distributors around the world make those decisions to increase or reduce inventory as they view the economic cycle ahead. So, I hope that gives you some context to that point, Sean.

[Sean Laaman, Morgan Stanley]

And one quick follow-up. I can sort of see the sort of, outlook for the healthcare side of the business. But how much variance with respect to guidance is there in some of the industrial assumptions given the macro outlook? If you can give us some sense or commentary on how you're thinking about that would be very useful.

[Neil Salmon, Chief Executive Officer]

And sorry, that's looking back over the last 12 months question, is it Sean?

[Sean Laaman, Morgan Stanley]

Looking forward to fiscal '24, just looking at the macro picture and sort of tying that into how you think about the Industrial performance in light of guidance.

[Neil Salmon, Chief Executive Officer]

Yes. So, I’m pleased with Industrial performance. It was – in the last 12 months, it was a little short of our targets at the beginning of the year, but I think that’s fully explained by what would a moderate slowdown over the last few months. But importantly, although PMIs have been below 50 for many months in the U.S., it dipped quite a bit in the last few months in Europe. Occasionally, you see reports of Germany being in recession or other countries in recession. Historically, that would have had a much stronger and direct correlation to our Mechanical growth rate. So, I think it’s encouraging that we need to grow that business.

Yes, the second half growth rate was lower than the first half, but it continued to grow and so far, expect it to continue to grow into the – into fiscal ‘24. So that business is continuing to perform at or above our previous long-term growth expectations and we’re encouraged by the potential coming through in innovation. We have one of our strongest new product portfolios at this stage. Those products are very profitable. They’re highly differentiated and they’re in strong demand by customers.

The Chemical business, I'd say the top line growth rate’is atisfyactory but not great. Chemical, though the margins have suffered more than Mechanical, because of where the manufacturing assets for that business are based, it’s more concentrated in Malaysia, where we see higher inflation factors, particularly on utilities and on people costs. So, a core element to the productivity investment program is to wrestle with those Chemical margins. We view there are some portfolios of the business, which we’re questioning whether we could be in for the long term. Generally, those are net 0 margin businesses. And so we’ll give you further updates as this program reaches decision points. But we have the opportunity to exit some of the really 0 differentiation chemical and protection. It’s actually not Chemical, but going to other markets and then also take out the – rationalize the manufacturing base or outsource those products, as I was mentioning earlier.

So in Chemical, the real focus is improving its EBIT margin and while continuing innovation, but the innovation opportunity in Chemical is not as big in Mechanical. So, I hope that gives you more context to Industrial, but overall, I’m pleased with how the Industrial business is performing. If you look at Industrial margins in total at 14%, that was the improvement level that it got to as we completed the previous restructuring program. So, I’m glad we sustained it at that level. And now I see opportunities to improve it, again, probably more in F ‘25 benefits going forward.

[Operator]

Your next question is from Saul Hadassin from Barrenjoey.

[Saul Hadassin, Barrenjoey]

Neil, one for you. Historically, Ansell has provided some longer-term organic growth rate forecast for, I think, for sales across the key GBUs. Just wondering if you're willing to provide your best thoughts on what you think Ansell can grow sales at across the 2 divisions, maybe into '25, '26? Are you sort of still sticking to that 3% to 5% organic type growth rate? Do you think anything has changed?

[Neil Salmon, Chief Executive Officer]

Yes. So, we have not updated it and that was for good reason because until we exit this destocking phase, it's hard to give -- well, our -- the sales we're selling into distributors are not a match to the fundamental growth rate. If we go back to that 3% to 5% and give you some directional comments. As I mentioned before, we had Mechanical at the lower end of that range. And indeed, that is the growth rate that we've seen F '19 to '23, as I commented, but that 5% growth seen in the last 12 months is an indicator that business can grow at the upper end of that range and that's certainly the ambition that I seek as we develop that portfolio going forward.

And then the Surgical business, 8% growth over 4 years. That maybe is a higher rate than we can see long term, but definitely, above the 5% range for both Surgical and Life Science. So then the real -- the key question then and I don't want to give a prediction at this stage is for the Exam/Single Use business, it's been through the most significant ride of elevated demand, destocking and a significant mix change in the business. So here, 1.8%, I think that was the number I showed and that included some pricing favorability. That's not our ambition for that business. So yes, if we can get Exam/Single Use also in -- or at the top end of that 3% to 5% range, then that will enhance Ansell's overall growth rate. We see encouraging signs.

Certainly, our Exam/Single Use business seems to be significantly outperforming the commodity-oriented players in Malaysia, who are still reporting very low rates of utilization, cash negative positions. So that just shows the benefit of our strategy of not focusing on the high-volume commodity end and instead on the differentiated portfolio. But it is a competitive marketplace. So -- but let me promise you a more thorough answer to that question in time, perhaps 6 months from now as we look ahead and set longer-term growth goals for the business.

[Saul Hadassin, Barrenjoey]

And just one quick one for Zubair. Just looking at inventory levels, Zubair, it looks like back to FY '22 based on the full-year '23 end result. Can you give us a sense of where you hope to get that inventory dollar value back to, say, by the end of FY '24?

[Zubair Javeed, Chief Financial Officer]

Yes. So, I don't usually and you've never heard us disclose inventory targets because we do like to maintain flexibility in how we approach service levels, safety, et cetera, and all what Neil has talked about. So -- but I will give you an indication that we're looking to reduce or exceed the $40 million to $50 million cash out that we've got from that accelerated productivity improvement program. And depending where demand is all or how we feel we're bedding down all of what Neil spoke to earlier on the supply chain improvement, we could accelerate those targets or we could pull back a little bit.

But certainly, we want to be able to self-fund that program that we just described. Of course, it will be predominantly focused on the Exam/Single Use in surgical product lines, of course. But again, we're pretty comfortable we'll still be able to meet the end use demand even with cutback levels of production. So, we'll speak more and describe more about this in the half year results.

[Operator]

Your next question comes from Daniel Hurren from MST Marquee.

[Daniel Hurren, MST Marquee]

I was just -- we just noted a very stark difference in margin performance for Industrial in the first half and second half. I was just wondering if you could unpack that a little bit and talk about what's happening there. And I guess, is second half the right way to think about it going forward?

[Neil Salmon, Chief Executive Officer]

Yes. So well, we flagged this 6 months ago, if you remember, and I've long said for Industrial that fundamentally, consistently I just achieved my 10th year anniversary at Ansell. And I've had this discussion in my previous role as CFO as President of Industrial and now CEO many times. And the question being, fundamentally, can we manage pricing to offset cost inflation and maintain a steady level of underlying margin and then step up margin when we do step change activities like we did with that manufacturing restructuring program of a few years ago.

And fundamentally, the answer to all of those is yes. But I've also said there will be periods because generally, we price 6 to 9 months in advance, sometimes 12 months in advance according to the customer relationships we have and our costs often move more quickly than that. So that's what we saw in the first half. We had an elevated period of inflation. We priced to -- not to the inflation we saw in the first half, but to the long-term inflation we expected. I told you those price increases would come through in January and they did. And we also saw some moderation in inflation as expected. And so the Industrial margin came back in line in the second half.

But I think a better read at the underlying fundamental margin in Industrial is the average for the year. That's what I expect to continue into next year. But of course, we are ambitious to improve that further. And the key area of focus, whereas the past the prior restructuring program was mainly focused on Mechanical manufacturing base. This new program, yes, it has a Healthcare element. The Industrial element is more focused on the Chemical margin. So, we expect that we won't see that benefit till F '25 or '26. We expect that to come through in those years as an improved industrial margin. But yes, I hope that gives you a bit more explanation of what's happening to Industrial margins.

[Daniel Hurren, MST Marquee]

And I guess within that, and if you think about that price increase, it appears that volume may have dropped off a little bit in the second half. Does that relate back to the comments that you made before about there is some slowing in some markets with interest rate environment?

[Neil Salmon, Chief Executive Officer]

Yes, that’s right. So China was probably the most significant swing first half, second half, where we saw – we did not see the bounce back that we were hoping after the COVID shutdowns ended. And automotive, which is, by far, our largest vertical in China, has been very soft in the last few months. So, we have opportunities to broaden our vertical focus in China and that’s what our very long-term successful Chinese team is focused on. Within Europe, actually, I think the more significant story is that even with some quite soft economic readings, we have continued to grow that business. And that’s – I don’t believe that by accident.

We put a lot of focus and Europe is a factor, in fact, ahead of some other parts of the world in adopting our new approach to end-user targeting. We’ve invested in new selling methods. We call it selling the Ansell Way and then really using our investment of some years ago in sales pipeline management to get a real focus on winning at the end users, while, of course, shoring up the base, as I mentioned, through improved service. So Europe, I would say, has in fact outperformed what you would forecast from economic conditions.

We see pockets of success in the U.S., but the U.S. has been affected in particular by some very significant destocking in the logistics vertical. You may remember that, that was a significant source of growth for Mechanical during the pandemic period and really was enough to offset all the manufacturing-related softness was growth in logistics as the e-commerce sector grew at a terrific rate. That has retraced its steps as you’re well aware, over the last year or 2 and also led to a destocking effect. If you back out tha’, then the Mechanical growth rate is even more impressive over the last 12 months. But I decided that 5% was enough without me having to give you yet another adjusted number for Mechanical. So yes, another bit of a headwind in that vertical, but offset by good growth in our Ringers portfolio to energy, good growth in our electrical protection range, as I mentioned earlier.

[Operator]

Your next question comes from Vanessa Thomson from Jefferies.

[Vanessa Thomson, Jefferies]

I just wanted to come back on the Surgical and Life Sciences destocking. We now think that the Exam pricing has stabilized. Given you expect another 6 to 9 months of destocking in Surgical and Life Sciences, where is pricing there? Or is it a separate effect in those categories?

[Neil Salmon, Chief Executive Officer]

Yes, pricing has not moved nearly as much. And generally, particularly in Surgical, most customer contracts are on a 3-year pricing basis. So that means that prices, except for some exceptional arrangements did not increase much during the pandemic. And in fact, with inflation having also affected Surgical, prices are a little bit behind the inflation pattern in Surgical right now. Now 1 of 2 things will happen from here, either we'll start to recover that in pricing or if some of those elements of inflation normalize, then we'll be back to a more steady state. So, there isn't a big effect on pricing in Surgical.

In Life Science, in our specialist life science products that go into clean rooms that are produced and packaged in sterile environments also limited pricing trends. But we do sell into Life Science, we included in our Exam/Single Use business, we do sell more standard Single Use products into Life Science, but that's within Exam/Single Use, and there we see the same pricing trend. So overall, pricing much less of a factor for Surgical and Life Science. So, it's really about clearing volumes.

[Vanessa Thomson, Jefferies]

And then just during the pandemic, you had talked about stockpiling and having 3 months of PPE on hand, do you have a feel for what customers given all these destocking, what customers have on hand now? Is that just a non-issue going forward?

[Neil Salmon, Chief Executive Officer]

Well, certainly, any intentions to avoid issues in the [Technical Difficulty] holding ongoing reserve levels of inventory, they have not come to pass. And so it’s hard to give you an average number because it’s across so many different players globally. And according to the length of supply chain, different parts of the world will hold different levels of inventory. But I would say average inventory already in many parts of our markets. And by the end of this period that I’m predicting for Surgical and Life Science will have retraced all the way back to pre-pandemic levels.

Of course, the second reason, it wasn’t just a pandemic disruption, but also that general period of supply chain uncertainty caused by and then continued by the Ukraine-Russia conflict. That led to customers holding elevated levels of inventory for longer than we had thought. And the speed of the correction has really been — we went within a really short period of time in Surgical from customers concerned about back orders, concerned about still building up to previously high imagery levels to then, it changed within a period of weeks and moved to a destocking phase as customers reassessed those various risk factors. And that was really in the —for Surgical that was in the first half of the last fiscal year that we saw that shift happen.

[Operator]

Your next question comes from Laura Sutcliffe from UBS.

[Laura Sutcliffe, UBS]

This is maybe an extension of some of the things you were talking about earlier. But could you maybe give us some thoughts on whether you believe your portfolio is going to be a different shape in any way come the end of your program in FY '26? Or should we expect things to look largely the way they do today?

[Neil Salmon, Chief Executive Officer]

Yes. So, we're not expecting any fundamental portfolio shifts if you're thinking about business exits or rationalization other than that one piece of the Chemical business. I'm not going to give specific details right now because it's not finalized. But there are some parts of Chemical, Chemical actually covers, it covers our products for the food industry. It covers products that go into household gloves. And so there's quite a wide range. There are similar types of products, but in food and in household gloves, the differentiation is less. The protection requirements are less than in the high-end chemical, which is where we focus for differentiation. But that's -- it's not a huge change. That's really -- it's a piece of our business, but not huge. So, I will update you on those.

Within Exam/ Single Use, we've really already done the portfolio shift that I talked about. At the beginning of the pandemic, we exit much of the lower-margin business that we did have, some private label, some retail-type business. And that's why that business today is a healthier mix than it was and we want that to continue. And no such big shifts in the other SPs. But I think key is that we continue that track record that I talked about of investing in differentiation. But also, we're really shifting our focus rather than selling product by product, we realize what customers really value from us is the portfolio solutions. And we're putting particular emphasis over the next few months on helping customers understand how the portfolio of choice they make impacts their sustainability goals. There really is no information today about if I make this selection of gloves and chemical protection overall, what is better for the environment.

And we see there are several competitors out there with, frankly, false claims or claims that are not what they appear, perhaps I should say it that way, whereas you don't really get an end-to-end sustainability benefit if you go for a product that claims to be carbon neutral, for example. So we, at Ansell, of course, we set ourselves a higher standard. And we're now -- we'll be rolling out in the next few months the sustainability characteristics of our core set of products across all our ranges, talking about how the raw materials are used, the manufacturing processes and whether they use renewable energy, the packaging configuration as well as the product materials themselves.

And so -- and that just goes to that significant piece of differentiation, which is helping customers understand the full portfolio they need and with our advice services also creating differentiation. Guardian that we've had in place for many, many years, we continue to invest in and improve and now in the future, Inteliforz, which brings a connected PPE into the frame as well. So that piece of differentiation is, I think, going to be increasingly important going forward alongside the product-specific differentiation.

[Laura Sutcliffe, UBS]

And then could you maybe also talk a little bit about what will happen to some of your manufacturing footprint under your productivity program? Are you, for example, running all of your build programs to completion? And is there anything that will be shut down?

[Neil Salmon, Chief Executive Officer]

So yes, we are running all our build programs to completion. We have the flexibility to adjust timing according to when we expect demand to come on. And in any case, some of the India facility was anyway delayed somewhat by government approvals and that’s fine against our latest estimate of when we will need that capacity. So no, we don’t expect to close entirely any facilities but we do see opportunities for optimization and rationalization within our footprint. So there may still be certain lines or certain aspects of the facility that we will rationalize. And generally, we’re doing that because we want to in-source often to the same facility products that are more differentiated.

So, it’s not the same – in the Horizon [ph] program, if you caught up on that, we shut 3 facilities and consolidated into a remaining footprint. We don’t have the same opportunity to do that this time. It’s more optimizing within our current network. And that is the reliability of our global network, both in-house and with now a smaller and much more closely managed set of finished goods suppliers is one of the – is another key differentiator that we bring to our customers. And again, no one else has the geographic diversity or the strength of third-party supply management that we now have and can offer to our customers for reliability of supply, but also reputation management because, of course, understanding how your products are made and where they made is now so k– to ourselves as well as to our more forward-thinking customers.

[Operator]

Your next question comes from Andrew Paine from CLSA.

[Andrew Paine, CLSA]

Just wanted to come back to your commentary that the majority of Exam and Single Use is now produced in-house. It would be good to just work through the longer-term benefits of this move, particularly on margins.

[Neil Salmon, Chief Executive Officer]

Yes. So, I said in volume terms, we'll get to about 50-50. The majority statement is true if you allow for the pricing difference and to revenue. So generally, our Ansell Seremban facility is a great facility, but it's a medium-sized facility against many of our competitors that have much larger facilities where the big volume is on the high-speed standard Thin-mil Nitrile as we call it, which they can run at terrific rates and they're just producing the one product. And of course, that is always a game about the absolutely lowest possible cost. But because that gives those producers generally good economies of scale, they're also quite competitive or similar on a competition base -- competitive basis to our ability to produce those products in-house. So, we don't get a huge margin improvement through in-sourcing versus outsourcing. On some sales, yes, but it's moderately favorable, I would say, over the total portfolio.

It's really about the differentiation that comes from the strategy. So, as I commented before, while we were very pleased with Careplus, in the joint venture configuration, we were aware that as we were -- if we were to introduce newer technology to that facility, we weren't going to be necessarily in control of that technology long term. So, now that Careplus is wholly-owned, we're stepping forward with those new product introductions that I talked about, including the one that I mentioned that Emirates has adopted for paint maintenance -- airplane maintenance. So that's really -- and also as we -- now these are step change innovations, which are not yet commercially proven. But if we can come up with a meaningful differentiation in Exam/Single Use in the carbon footprint of the product through working with buy-based raw materials combined with different manufacturing processes. Then that's a real breakthrough and a step change for that product range and we want to be sure that, that technology is only understood by ourselves.

So, it's really a differentiation point. And it's also important to our customers. As I mentioned, those -- and this is increasingly the case, we really want to understand where their products are made. That's something we can give them. And with a level of transparency and visibility, both the processes at Ansell and the processes at our suppliers, whether raw material or finished goods suppliers. So that level of transparency and integrity to the supply chain is an increasingly high prominent aspect of conversation with key customers globally. So that's the value of the in-sourcing strategy, for Exam Single Use.

[Andrew Paine, CLSA]

And then just one other thing on the transformation program that you had previously. Just thinking that you're targeting over $30 million in savings from that program. Is the new program a progression of the old one? Or did you -- were you able to book that $30 million savings from the transformation program? Or any update you can provide there?

[Neil Salmon, Chief Executive Officer]

Yes. So yes, we recorded and have sustained that prior program benefits. And as I mentioned, it was largely the mechanical business, which -- where we saw that manufacturing rationalization, the facilities we shut down were mechanical facilities and we consolidated that production into -- in one case, a dedicated mechanical facility, but in other cases, multiproduct facilities. For example, our largest Sri Lanka facilities. And we have sustained that improvement. It's been difficult to see in the overall Ansell margin, but that's because of the margin trajectory that the healthcare business has been on rather than the industrial business. So, this is not certainly not redoing programs previously completed. We believe we've sustained those benefits, locked them in. And now we have -- and now we're shifting our focus to other parts of the business where productivity opportunities exist.

[Operator]

Your next question comes from David Bailey from Macquarie.

[David Bailey, Macquarie]

Two questions for me. Just firstly, within Surgical, just interested in the competitive dynamics in that SBU. I know there was some comments a few hours ago that maybe there's been some increased capacity coming online from other suppliers. Just to understand what that segment looks like from a competitive standpoint? And then secondly, following on from Saul's question about those medium to longer-term targets, 6% to 12% was the EPS total. If I'm not mistaken, the LTI '23 to '25 swing. I'm just interested to understand why there's a difference there and if that's a new baseline going forward.

[Neil Salmon, Chief Executive Officer]

So, Surgical capacity. So yes, part of the reason that we had elevated sales in F ‘22 in Surgical was that the major branded competitors to us were behind in their cycle of capacity addition. And so – and some of that demand was substituting for back orders on front that arose for those other suppliers. Some of it, in some cases, and we have taken a step forward in structural market share in the U.S., but our sales in F ‘22 had an additional boost from temporarily fulfilling competitor orders that they were not able to ulfil. So that’s come back out again now. And we have sustained that step change improvement in market share.

But yes, our growth rate. Now we have all the 4 major players have restored their product availability. And so back orders, which were acute even 12 months ago or 10 months ago, are now largely addressed across the industry. Yes, pretty much – well, the 3 of the 4 major players, ourselves included, do have plans to bring additional capacity to the market over the next few years. But particularly, if you look at the underlying synthetic surgical rate of growth, we expect that to be absorbed by demand over the period in which capacity comes on, assuming that each participant is suitably flexible about when they bring additional capacity to market. So of course, that’s to be seen. I can’t comment and I’m unaware of future plans of our competitors, but it’s certainly the approach that we will take.

So, there was a lot of talk about are we going to see a whole range of new entrants to Surgical. Again, in my 10-year time horizon, I’ve fielded that question, it seems like every year or 2, so far, really not so. So yes, there are Malaysian producers who are more dedicated to Exam/Single Use, who also make a competent low end range of surgical products. But those are largely the same participants, pre-pandemic to now, and we’re not seeing a major increase in the number of competitors for Surgical. So, some additional capacity has come to market. We anticipated that. That meant that the back order situation is now resolved. But fundamentally, we don’t see that as anything more than a normalization of supply-demand dynamics and not – we don’t see the same substantial excess of supply that is affecting commodity Exam/Single Use players. Us less, as I commented already.

But certainly in the commodity Exam/Single Use space, there’s been a substantial oversupply. But we also see Malaysian players, in particular, announcing quite major reductions in capacity and they’re closing often their older facilities and then doubling down on these newer lines, which, as I mentioned earlier, are really focused at the lowest cost possible position for the commodity thin-mil nitrile styles. So that was the first part of your question, but I’m going to have to – you’re going to have to remind me what the – the EPS growth rates for long-term incentive plans, yes.

So well, those are set each year by the Board. And the Board hasn’t announced the new program yet for – that will start in F ‘24, so I shouldn’t get ahead of the Board making that announcement. But yes, those are typical ranges that we see. So, in the order of high mid-single-digit EPS growth will typically be the midpoint of the long-term incentive plan. But as I noted, we also use revenue from time to time as a metric and we use ROCE from time to time as a metric as well.

[Operator]

Thank you. There are no further questions at this time. I'll now hand back to Neil for closing remarks.

[Neil Salmon, Chief Executive Officer]

Thank you. Well, thank you for the good questions and for the level of interest in this call today. As I've said, we're not excited by the earnings projection that we've given you for the next 12 months, but I am excited by the long-term potential for this business. I believe the decisions we're making over the last couple of weeks will power the business forward. Yes, more productive and with a cost base fit for our business and our markets, but also a more effective business that can deliver on its potential and achieve higher organic growth rates going forward as well.

I very much look forward to updating you on our progress as we go through the next 12 months and I thank you for your attention today. And with that we'll conclude the call.