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TOP Glove Corp Bhd released its best-ever quarterly results last week with a net profit of more than RM1 billion, meeting consensus expectations. The stellar growth stemmed from the global surge in demand for gloves as a result of the Covid-19 pandemic.

After the release of the results, executive chairman Tan Sri Lim Wee Chai responded to questions raised earlier by The Edge in an article carried on theedgemarkets.com. The questions covered a range of topics, including the detention order imposed on Top Glove’s subsidiaries by the US Customs and Border Protection (CBP), the utilisation of its cash pile, oversupply concerns and sustainability of the demand for gloves.

The Edge: The surge in glove usage worldwide is mainly driven by the pandemic. Does Top Glove expect the current high demand for rubber gloves to be affected by the availability of a vaccine, which will be more effective in containing the spread of the virus?

Lim: We hope a vaccine can be found soon to save people’s lives. If a vaccine is found, demand may be less intense as urgent buying will reduce. However, pre-Covid-19, global glove demand was already growing at about 10% annually and will continue to grow steadily driven by:

•    Gloves becoming an essential item in the healthcare sector, serving as a protective barrier for medical staff, as customer awareness in developing markets increases

•    Gloves are relatively inexpensive and as [they are] disposable items, the demand is recurring

•    Increasing hygiene standards and healthcare awareness in non-medical sectors (in developed countries) and medical sectors (in developing countries)

•    A growing ageing population, with the elderly being more susceptible to disease

•    Progressively stringent health regulations such as reforms in the US and China

•    The emergence of new health threats, for example, Covid-19, A(H1N1), SARS, bird flu, Ebola, bio-terrorism and anthrax

Moreover, even with a vaccine, gloves will still be needed for testing and administering the vaccine. However, we believe it will take some time for a vaccine to be developed and produced. In addition, not everyone will have access to the vaccine immediately.


Post-Covid-19, while demand will stabilise, we believe it will not revert to pre-pandemic levels owing to increased hygiene awareness.

Are the strong orders the result of stockpiling by distributors amid concerns of a supply shortage? Meanwhile, elective surgeries are being postponed at this time. How sustainable is the current strong demand and what is the demand pattern expected to be like in the next 18 months?

According to feedback from our customers in the US, Brazil and Germany, the existing stock holding is less than two weeks compared with two to three months normally. Thus, the demand is for current usage.

Gloves are an essential item in the healthcare industry and are recession-resilient. With the increasing awareness of personal hygiene, we are confident that demand will continue to increase. There is a lot of potential for growth as gloves are widely used in developed countries, but still underused in emerging markets.

As an illustration, currently 20% of the world’s population (the US, Europe and Japan) account for 70% of glove usage. Hence, 80% of the world’s population is using only 30% of the gloves produced globally, which means there is still a lot of opportunity for growth. With Covid-19, Top Glove estimates that glove demand will grow by 20% per annum in 2020, 25% in 2021 and 15% post-Covid-19.

Over the past four months, there has been a rush to enter the rubber glove industry. These new players are setting up plants and planning to start production next year to help fulfil the anticipated strong demand. Is this a concern for the incumbents, which are also expanding their capacity aggressively?

The newcomers are relatively small players in the industry. About 1½ to 2 years is required to build production lines. The new entrants will need to get contractors to build the production lines. However, contractors are busy with the demand from existing players.

Furthermore, new entrants may face difficulties in sourcing for the nitrile raw material in view of the supply shortage. We welcome healthy competition as it pushes us to improve and makes the industry more efficient.

The glove business, however, is challenging and competitive. When we first started, there were about 200 players. But only about 50 survived. Even if there is an oversupply, it will be temporary. As demand is growing steadily, we believe any oversupply situation will normalise as the increased supply will eventually be absorbed.

We also have a loyal customer base worldwide whose confidence and trust we have earned over the years with our good track record of delivering high-quality gloves at an efficient [and] low cost.

Will the US CBP’s detention order be revoked by year-end? It has been two months since the detention order on rubber gloves produced by the group’s two subsidiaries, Top Glove Sdn Bhd and TG Medical Sdn Bhd, was placed on July 15. On Sept 7, Top Glove submitted an audit report to the US CBP, in relation to the alleged forced-­labour issue filed against it.

North America accounts for at least a quarter of the group’s sales volume. Top Glove has indicated that the group has received a year’s worth of orders in the pipeline. Do these orders include any shipments to the US?

Yes, it includes shipments to the US and also many other countries. Top Glove has been actively engaging with the US CBP towards resolving the withhold release order expeditiously and is progressing well towards a resolution. CBP has been very professional and cooperative in the engagement. An independent audit has been conducted, which entailed virtual interviews of about 1,100 workers.

The total remediation payment is estimated at RM53 million, subject to finalisation with the US CBP. We have made two remediation payments, each at RM4.4 million on Aug 10 and Sept 10. The independent audit report was submitted to the US CBP on Sept 4. We believe that as the CBP gets to know Top Glove better, they will learn more about our social compliance and improvements made, especially with regards to our workers, which we may not have publicly disclosed. We hope to resolve the matter soon and move on strongly, so we can continue to do well by doing good.

The group has earmarked RM3 billion for capital expenditure (capex) to build 450 new lines, which will generate a new capacity of 60 billion pieces of gloves from 2020 to 2026. Currently, Top Glove has 46 factories and 724 production lines with an annual capacity of 85.5 billion pieces of gloves. While Top Glove is expanding capacity, does it have sufficient labour on its factory floor? Given the government’s efforts to reduce the dependence on foreign workers, will the company invest more money in automation?

Due to our investment in automation and continuous R&D, we have improved productivity by 78%, from 8.4 workers per million (WPM) pieces of gloves to only 1.80 WPM currently. This will continue to go down. Continuous investment in automation and digitalisation will enable us to work more efficiently and effectively. We invested in advanced technology and projects incorporating artificial intelligence (AI) and robotic process automation three years ago.

With the automation and labour-saving projects in place, we were also able to fully utilise our capacity to produce more gloves during this critical period, at the same time reducing dependence on manual labour. Due to the travel restrictions on foreign workers, we recruit more skilled local workers as well as more engineers, who are able to perform higher-value tasks.

The group has earmarked RM8 billion for capex over the next six years, from FY2021 to FY2026, which will provide us with an additional capacity of 100 billion pieces of gloves. The RM8 billion will be invested in new capacity, the enhancement of existing manufacturing facilities, a gamma sterilisation plant, land bank for future expansion, Industry 4.0 digitalisation and improvements to our workers’ facilities.

Top Glove spent RM210 million over three trading days to buy back shares on the open market when the stock was sold down heavily. The move has raised eyebrows simply because the current share price is relatively high compared with six months ago despite the recent drop. While the group’s cash pile is expected to grow fast as a result of brisk glove sales, how will the group utilise it? Will there be any special dividend in the pipeline since Top Glove is willing to spend on share buybacks when its share price is still high?

The cash will be used as capex, for dividend payouts as well as potential strategic acquisitions. Dividend payouts for FY2020 amounted to 11.8 sen per share, or a total payout of about RM961.2 million. The total dividend of 11.8 sen represents an increase of 9.3 sen, or 373%, over FY2019, which is a net profit payout ratio of 51%.

In terms of M&A [merger and acquisition] opportunities, it will enable us to expand faster via the inorganic route, in addition to the organic expansion being pursued. We will take note of the special dividend for the following quarters.

Do you see the likelihood of a windfall tax on glove makers?

As of now, the authorities have not had a dialogue with the Malaysian Rubber Glove Manufacturers Association (MARGMA) about this. However, with our strong profit, we are already paying a substantially higher amount of income tax to the government.


http://www.theedgemarkets.com/article/top-glove-chairman-strategy-and-tackling-challenges-company-posts-record-profit

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