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TOP Glove Corp Bhd posted its best quarterly results last week with a net profit of over RM1 billion, meeting consensus expectations. The stellar growth was due to the global increase in demand for gloves as a result of the Covid-19 pandemic.
Following the release of the results, CEO Tan Sri Lim Wee Chai responded to questions previously posed by The Edge in an article posted on theedgemarkets.com. The questions covered a variety of topics, including the arrest warrant imposed on Top Glove subsidiaries by the U.S. Customs and Border Protection (CBP), the use of its pile of cash, concerns about excess cash. supply and sustainability of glove demand.
The Edge: The increase in glove use around the world is mainly due to 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 that a vaccine can soon be found to save people’s lives. If a vaccine is found, the demand may be less intense as urgent purchases will be reduced. However, prior to Covid-19, global demand for gloves was already growing by about 10% annually and will continue to grow steadily driven by:
• Gloves become an essential item in the healthcare sector, serving as a protective barrier for medical personnel, as customer awareness in developing markets increases.
• Gloves are relatively inexpensive and so [they are] disposable items, demand is recurring
• Increase hygiene standards and awareness of health care in non-medical sectors (in developed countries) and medical sectors (in developing countries)
• An aging population, and the elderly are more susceptible to disease.
• Progressively strict health regulations, such as reforms in the US and China
• The emergence of new health threats, for example, Covid-19, A (H1N1), SARS, avian flu, Ebola, bioterrorism and anthrax.
Also, even with a vaccine, gloves will still be needed to test and administer the vaccine. However, we believe that it will take some time to develop and produce a vaccine. Also, not everyone will have access to the vaccine immediately.
After Covid-19, although demand will stabilize, we believe that it will not return to pre-pandemic levels due to increased hygiene awareness.
Are the heavy orders the result of stock build-up by distributors amid concerns of a supply shortage? Meanwhile, elective surgeries are postponed at this time. How sustainable is the current strong demand and how is the demand pattern expected to be in the next 18 months?
Based on feedback from our customers in the US, Brazil and Germany, the existing stock is less than two weeks compared to the usual two or three months. Therefore, the suit is for current use.
Gloves are an essential item in the healthcare industry and are resistant to the recession. With the growing awareness of personal hygiene, we are confident that the demand will continue to increase. There is great potential for growth as gloves are widely used in developed countries but are still underused in emerging markets.
As an illustration, currently 20% of the world’s population (USA, Europe and Japan) account for 70% of glove use. Therefore, 80% of the world’s population uses only 30% of the gloves produced globally, which means that there are still many opportunities for growth. With Covid-19, Top Glove estimates that the demand for gloves will grow 20% annually in 2020, 25% in 2021 and 15% after Covid-19.
For the past four months, there has been a rush to enter the rubber glove industry. These new players are installing plants and plan to start production next year to help meet the strong anticipated demand. Is this a concern for incumbents, who are also aggressively expanding their capacity?
The newcomers are relatively small players in the industry. It takes about 1½ to 2 years to build production lines. New entrants will need to secure contractors to build the production lines. However, contractors are busy with the demand from existing players.
Also, new entrants may find it difficult to source nitrile feedstock due to supply shortages. We welcome healthy competition as it drives us to improve and makes the industry more efficient.
However, the glove business is challenging and competitive. When we started, there were about 200 players. But only about 50 survived. Even if there is an oversupply, it will be temporary. As demand grows steadily, we believe that any oversupply situation will normalize as increased supply is finally absorbed.
We also have a loyal customer base around the world whose trust and confidence we have earned over the years with our good track record of delivering high quality gloves at an efficient price. [and] low cost.
Will the US CBP arrest warrant be revoked before the end of the year? Two months have passed since the arrest warrant for rubber gloves produced by the group’s two subsidiaries, Top Glove Sdn Bhd and TG Medical Sdn Bhd, was issued on July 15. On September 7, Top Glove submitted an audit report to the US CBP regarding the alleged forced labor issue brought against them.
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 of pending orders. Do these orders include shipments to the US?
Yes, it includes shipping to the US and many other countries as well. Top Glove has actively engaged with the US CBP to resolve the detainer release order expeditiously and is progressing well toward resolution. CBP has been very professional and cooperative in engagement. An independent audit has been carried out, which involved virtual interviews with some 1,100 workers.
The total repair payment is estimated at RM 53 million, subject to completion with the US CBP We have made two remediation payments, each of RM4.4 million on August 10 and September 10. The independent audit report was submitted to the US CBP on September 4. We believe that as CBP gets to know Top Glove better, you will learn more about our social compliance and the improvements made, especially regarding our workers, that we may not have publicly disclosed. We hope to resolve the matter soon and move steadily forward, so that we can continue to do well if we do well.
The group has allocated RM3 billion for capital expenditures (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 its capacity, do you have enough manpower in your factory? Given the government’s efforts to reduce reliance on foreign workers, will the company spend more money on automation?
Thanks to our investment in automation and continuous R&D, we have improved productivity by 78%, from 8.4 workers per million (WPM) of glove parts to just 1.80 WPM today. This will keep going down. Continued investment in automation and digitization will allow us to work more efficiently and effectively. We invested in advanced technology and projects that incorporate artificial intelligence (AI) and robotic process automation three years ago.
With automation and labor-saving projects in place, we were also able to fully utilize our ability to produce more gloves during this critical period, while reducing reliance on manual labor. Due to travel restrictions for foreign workers, we hire more skilled local workers, as well as more engineers, who can perform higher value tasks.
The group has earmarked RM8 billion for capital investments over the next six years, from fiscal year 2021 to fiscal year 2026, providing us with an additional capacity of 100 billion pieces of gloves. The RM 8 billion will be invested in new capacity, upgrading of existing manufacturing facilities, a gamma sterilization plant, a land bank for future expansion, the digitization of Industry 4.0, 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 shares sold strongly. The move has drawn attention simply because the current share price is relatively high compared to six months ago despite the recent slide. While the group’s cash pile is expected to grow rapidly as a result of strong glove sales, how will the group use it? Will there be any special dividend pending as Top Glove is willing to spend on share buybacks when its share price is still high?
The cash will be used as a capital expenditure, for dividend payments and possible strategic acquisitions. Dividend payments for fiscal year 2020 amounted to 11.8 sen / share, or a total payment of approximately RM961.2 million. The total dividend of 11.8 sen represents an increase of 9.3 sen, or 373%, over FY2019, which is a 51% net profit payment rate.
In terms of mergers and acquisitions [merger and acquisition] opportunities, will allow us to expand more quickly through the inorganic route, in addition to the organic expansion that is sought. We will take note of the special dividend for the following quarters.
Do you see the likelihood of a windfall tax for glove manufacturers?
Until now, the authorities have not had a dialogue with the Malaysian Rubber Glove Manufacturers Association (MARGMA) on this issue. However, with our strong earnings, we are already paying a substantially higher amount of income tax to the government.
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