Industry Overview

The past twelve (12) months of FY2011 have been rather challenging for the rubber glove industry as a whole, as it continued to face margin pressures on subdued demand, high raw material costs and the weak US dollar.

After a record 2010 in which the influenza A(H1N1) virus outbreak caused a surge in glove demand, the industry was faced with an overstocking situation by some of the healthcare providers and major distributors. Demand is gradually normalising, and we expect the sector to resume growing by 8% to 10% annually like it used to.

The average latex price rose by 46%, from RM6.12/kg in FY2010 to RM8.92/kg in FY2011, due to the tightness in rubber supply amid an increase in demand from China and India for their booming auto and tyre manufacturing industries. The situation was further compounded by bad weather, i.e. severe drought and unusually heavy rainfall in Thailand, the prolonged wintering season, outbreak of rubber tree bark disease in Vietnam as well as higher-than expected rubber tree replanting activities in most major producing countries.

During the period, the US dollar has also weakened against the Ringgit Malaysia by around 8%, as major economies grappled with uncertainties.

Fortunately, the latex prices have corrected sharply in the last seven months, in tandem with other commodity prices amid growing global economic concerns, and as weather conditions improved. Latex prices have since declined about 27% from its peak of RM10.99 on 11 April 2011 to around RM7.98 as at 24 October 2011.

Despite the challenging operating environment, we remain buoyant on the longer term outlook of the rubber glove industry due to its recession-resilient nature. Being a necessity item especially in the healthcare and food industry, we believe demand will remain robust despite the possible global economic slowdown.

Furthermore, there are still boundless new opportunities available to us, particularly in emerging markets which make up about 89% of the world’s population but which currently consume only around 32% of the world’s rubber gloves. Demand is set to increase as the health care standards in these markets improve.

Malaysia is currently the world’s largest producer of rubber gloves, accounting for 63% of the rubber gloves produced worldwide. Under the Economic Transformation Programme, the Malaysian government has set a target for the rubber glove industry to achieve a total export sales value of RM30 billion by 2020, growing at 13% year-onyear. With such a tall ambition, the government is set to ensure we overcome the challenges to growth by expanding rubber plantations and increasing the country’s global market share of rubber gloves.

Review of Operations

Given the high latex prices, the Group has increased the production of nitrile gloves to avoid over reliance on natural rubber gloves. Ultimately the Group plans to achieve a more balanced product mix in order to protect against fluctuation in nitrile raw material prices as well. Therefore, the Group's new production lines have been built to be inter-switchable between producing natural rubber gloves and nitrile gloves.

During FY2011, the Group commissioned 2.25 billion pieces of glove capacity Group-wide. A new factory in Klang, Malaysia, Factory 21 was installed with 16 advanced nitrile glove production lines. At the same time, the Group has added 8 new production lines to Factory 18 in Banting, Malaysia.

As of the end of FY2011, the Group also has capacity expansion projects that are in progress, involving 6.3 billion pieces of gloves to cater to the demand of nitrile gloves. By the end of May 2012, the factory expansions and new facilities will have increased the Group’s capacity to around

Financial Highlights

After an exceptionally strong performance in 2010, in which the Group made record profits, 2011 has proven to be more challenging. Soaring latex prices had increased costs but recovering them through higher selling price had not been as straightforward.

Due to an oversupply situation in the glove industry, it was difficult for the Group to pass on the rise in costs to its customers in full. Furthermore, there was a time lag in the cost passthrough that we have to contend with.

Despite the difficult circumstances, the Group sales revenue remained strong at RM2.05 billion, albeit a little lower compared to RM2.08 billion in the previous year. Overall profitability decreased 54% to RM115.13 million from RM250.41 million, due largely to the rise in latex prices and the impact of the weaker US dollar.

The Group’s balance sheet position as at 31 August 2011 remained healthy with a net cash position of RM257.12 million and almost nil net borrowings. The Group’s expansion had mainly been internally financed. Total shareholders’ equity stood at RM1.15 billion and net asset per share was RM1.85.

Dividends

In line with the results, the Board of Directors has recommended a final dividend of 6 sen per share (single tier) amounting to approximately RM37.11 million, for FY2011. The proposed final dividend is subject to shareholders’ approval at the forthcoming Thirteenth Annual General Meeting.

The Group has on 17 June 2011 declared an interim dividend of 5 sen per share amounting to RM30.92 million in conjunction with the financial results announcement for the third quarter ended 31 May 2011. Payment of the interim dividend was made on 21 July 2011.

Despite the weaker profit, the Group’s cash position remains strong, enabling the Group to pay 11 sen full year dividend, which is equivalent to a 60% payout ratio.

Corporate Social Responsibility

Corporate social responsibility is an area of strategic focus for Top Glove. We cannot achieve our objective to be recognised as the top rubber glove manufacturer in the world without holding responsibility, integrity, transparency and sustainability at the very centre of our business. The way we do business is designed to deliver sustainable value to all stakeholders to the society at large.

For more information on how we are advancing sustainable development, please refer to our Corporate Social Responsibility report on page 29.

Moving Forward

At Top Glove, we are keenly aware of today’s industry scenario and remain steadfast in achieving our objectives. The past year has revealed the changing landscape of the business with the volatility in the global economic sentiment, commodity prices and foreign exchange being the major causes for concern.

Although latex prices are already stabilising, we have not lost sight of preparing for the longer term. We are fortunate that due to our strong performance in the last 20 years and our cost efficient business model, we now have a strong balance sheet and cash flow position to deal with the challenges and the economic uncertainty that we are faced with. We are also in a good position to make the necessary investments and improvements to stay competitive in the long run.

In order to mitigate the volatility in latex costs in the future, we have started to work on acquiring suitable land locally as well as abroad for rubber plantation development.

Besides, we are also focused on achieving a more balanced product mix by increasing our production of nitrile gloves, to avoid over reliance on natural rubber gloves. However, nitrile prices are also subject to volatility as nitrile is made from a by-product of crude oil, which is a finite resource and has other competing usage.

Therefore, we have invested in building production lines that are inter-switchable between producing natural rubber gloves and nitrile gloves to buffer against the sudden surge in prices of any of these raw materials.

We are also investing in more highly automated production lines to ensure more efficient production of consistently high quality products.

Over the longer term, demand for gloves is set to rise by about 8% to 10% per annum, led by growth in the usage of medical gloves in emerging countries on the back of growing healthcare awareness especially after the H1N1 pandemic, healthcare reforms in China and India and the rising health care standards in these markets.

To capture this opportunity, we have embarked on a reorganisation of our marketing team to focus on special growth areas, while we continue to strengthen the team via aggressive talent development. Simultaneously, we are looking into moving towards downstream distribution in selected markets.
 

Meanwhile, the Group is committed to strengthening its leadership position within the rubber glove industry through continued focus on product quality enhancement and product innovation via research and development, technological advancement, cost-effectiveness improvement and running its business with honesty, integrity and transparency.

Appreciation

A great deal was accomplished in the past 20 years and we owe this to the commitment, dedication and hard work of our management and employees. To all members of the Top Glove family, our heartfelt thank you for helping Top Glove reached the top and maintaining our position as the world's largest rubber glove manufacturer in the last seven years.

The Group is also indebted to our Board of Directors for their valuable guidance and wisdom. On behalf of the Board, we would like to welcome Mr. Lim Han Boon, who joined the Board as an Independent Non-Executive Director on 21 February 2010.

We would like to take this opportunity to express our deepest condolences to the bereaved family of Mr. Quah Chin Chye, our former Senior Independent Non-Executive Director of the Board, who passed away peacefully on 9 January 2011, after having served the Group for 10 years.

And of course, our sincere appreciation and gratitude to all our shareholders, customers, suppliers, financiers, business associates and government agencies. Your continuous support and confidence in our products and the Group has pushed
us to work even harder to achieve even better results.

We are mindful that what we have achieved to today are the result of the hard work and decisions made in the past. Where we will be in the next 20 years would very much depend on the seeds we sow today. Hence, you have our unwavering commitment to continuously improve and innovate to ensure we consistently produce excellent quality products that enrich and protect human lives.

Thank you.