Gale Pacific Limited (GAP.AX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for joining us today. There's a quorum present, and I now declare the meeting open. I'm David Allman, Chairman of Gale Pacific Limited. I would like to introduce you to our Board of Directors. We have Mr. Peter Landos, Non-Executive Director; Donna McMaster, Non-Executive Director; and Tom Stianos, also Non-Executive Director. Also present today are Troy Mortleman, our Chief Executive Officer; Dexter Clarke, Chief Financial Officer; and Sophie Karzis, our Company Secretary. Also in attendance today are the company's auditors, Ernst & Young, represented by Amy Hudson, the partner responsible for the company's audit for the financial year ended 30 June 2025. I also welcome representatives of the company's share registry, Computershare Limited. The notice for this Annual General Meeting was circulated to shareholders within the required period, and copies of the notice are available from the registration desk. If there are no objections, I would like to move that the notice be taken as read. Today's meeting is being held both in person and online via the Computershare meeting platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit votes. Voting today will be conducted by way of a poll on all items of business. I will shortly open voting for all resolutions. Only Gale Pacific shareholders or their duly appointed representatives or proxies are eligible to vote at this meeting. For those attending in person, shareholders and proxy holders would have received on registration a voting card that provides for the holding of poll on resolutions put to shareholders. You will need to complete this card in order for your vote to be counted. For those who are attending online, if you are eligible to vote, once voting opens, press the vote icon and all resolutions will be activated with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. You will receive a vote confirmation notification on your screen. You can change your vote up until the time I declare voting closed. Voting on the items of business will be conducted by a poll, and I am declaring the poll open now, so shareholders and proxy holders can vote at any time. The results of the poll will be notified to the ASX and published on the company's website following the meeting. As I put the resolutions at today's meeting to shareholders, I will offer shareholders the opportunity to ask questions. For those in the room, please raise your hand. Online attendees can submit questions at any time. To ask a question, select the Q&A icon, type your question into the text box. Once you have finished typing, please hit the send button. To ask a verbal question, please follow the instructions written below the broadcast. Please note that while you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that your questions may be moderated or if we receive multiple questions on one topic, amalgamated together. At this meeting, there will be 4 items of business, including 3 shareholder resolutions. All 3 of these questions will be proposed and voted on as a simple majority. There have been proxies received in respect of today's resolutions, which I intend to disclose when those resolutions are considered. As mentioned in the Notice of Meeting, it is intended that any undirected proxies given to the Chair will be voted in favor of the relevant resolution. Before we move to the formal business of the meeting, I will first provide some observations about the company and the FY '25 performance. I'll then hand over to our Chief Executive, Troy Mortleman, who will provide a review of the business and our performance in FY '25 as well as provide a trading update on the first quarter of FY '26. We'll then move on to the procedural matters of today's meeting. Copies of my address and the CEO's presentation have been lodged with the ASX and will be published in the Investors section of the company's website. This time last year, we announced a new global leadership model and appointed Troy as our CEO. I'm pleased to say that the Board is very pleased with how Troy has taken command of the role during the past year. and that he has built a very capable senior executive leadership team and driven progress across the business. FY '25 was a challenging year for Gale Pacific. and our financial results did not meet our expectations. Reported EBITDA was $12 million. On a normalized basis, excluding nonrecurring costs, EBITDA was $19.5 million, broadly consistent with the prior year. Regionally, Australia, New Zealand and developing markets delivered in line with expectations, maintaining stable revenue and margin performance. The Americas region underperformed significantly. Midyear announcements from the U.S. administration on new international tariff arrangements, followed by the imposition of substantial tariffs on China produced products, disruptive peak Northern summer trading, and this resulted in a 25% decline in second half revenue and a $5.3 million reduction in second half regional EBITDA from the Americas. The Americas continues to be our most profitable region and remains central to our growth strategy. However, we anticipate that trading conditions will remain challenging in the near term with elevated input costs expected to be passed through to shelf pricing, which will likely further constrain consumer demand. In response, your Board and management team have acted decisively to address these headwinds. We have restructured our U.S. operations implementing a lower cost operating model to restore competitiveness and protect margins. Across the Americas business, we are reviewing all operational functions to ensure our organization remains lean and agile, driving efficiency and supporting long-term growth. At the same time, we are advancing supply chain diversification to reduce reliance on China produced products and thereby mitigate tariff exposure. Looking ahead, our CEO, Troy Mortleman will outline immediate actions taken to stabilize performance, longer-term plans to restore profitability and growth. and provide an update on FY '26 trading and strategic priorities. Your Board recognizes that recent financial performance has not met expectations. We remain fully committed to addressing these challenges and delivering sustainable value for our shareholders. We believe we have the right plan and the right leadership team to execute the plan. Our focus remains on disciplined cost management, supply chain resilience and positioning Gale Pacific for renewed growth in our core markets. On behalf of the Board, I would like to thank shareholders for your continuing support, and I'll now hand over to Troy.

Well, good morning, and thank you for joining us today at our 2025 Annual General Meeting. My name is Troy Mortleman, CEO of Gale Pacific. Joining me today alongside of our Board of Directors is our Chief Financial Officer, Dexter Clarke. Also in attendance are members of our executive and Australian senior leadership teams. This morning, I'll provide a brief overview of who we are at Gale Pacific before stepping you through our FY '25 performance, provide a trading update for the first quarter of FY '26 and share the refinements we've made to our strategy, look at our brand and website refresh and outline key priorities and outlook for the year ahead before we conduct the formal business of the meeting. Gale Pacific is a global leader in technical fabrics and shade solutions. For over 70 years, we've delivered innovation, engineered durability and sustainability across commercial, industrial and consumer markets. Our products are trusted worldwide from agriculture and construction to home improvement with our Coolaroo brand synonymous with outdoor comfort and sun safety. What truly sets us apart is our commitment to engineered performance. We invest in proprietary manufacturing technologies and rigorous R&D ensuring our solutions deliver real-world benefits, protection, longevity and sustainability. Our story began in Melbourne in 1951, when Harry and Barbara Gale founded Gale Scarves as a family business, initially producing scarves and baby clothing. In the mid-1970s, we applied our expertise in knitted apparel to create knitted shade cloth, a breakthrough innovation that has become the defining feature of Gale Pacific. After refining this innovation in Australia, we entered the United States market in the late 1990s and soon after expanded into the Middle East, where we've now operated for around 25 years. In the early 2000s, we shifted our shade fabric manufacturing to a dedicated facility in China and enhanced our manufacturing capabilities with local coated fabric production. Through these milestones, Gale Pacific has evolved into a global leader in technical industrial textiles. Gale Pacific operates a truly global business with presence in key regions across Australia, the United States and the Middle East. As part of our growth strategy, we have expanded our presence in Latin America by establishing new distribution partnerships in Mexico and Argentina and have recently established a sales presence in Thailand. Our operations are supported by a strategic manufacturing and distribution network, enabling us to meet the demands of our diverse customer base. Our global team totals 420 and brings together a broad range of skills and perspectives, all dedicated to delivering value for our customers at scale. To our results then for FY '25. FY '25 was a year of 2 distinct halves. We delivered strong momentum in the first half with revenue growth and margin improvement across all regions. However, the second half presented a very different environment, particularly in the United States, where consumer confidence fell sharply and elevated tariffs on imported products into the U.S. placed sustained pressure on demand during the peak North American trading season. Revenue for the full year fell by 1.2% to $172 million. Earnings before interest, tax, depreciation and amortization declined by $2.2 million to $12 million, in line with our guidance. When adjusting for nonrecurring costs associated with the implementation of the Microsoft Dynamics 365 ERP platform, executive leadership transitions and the write-off of capitalized development costs, normalized EBITDA reached $19.5 million, representing a modest improvement on the prior year. At the close of FY '25, net operating cash flow was $0.1 million compared to $26.7 million in the prior year, driven by elevated working capital at year-end, following lower-than-expected sell-through in the Americas during the second half. This increase in working capital was the key driver of higher net debt, which rose to $8.9 million compared to $0.7 million in the prior period. Turning now to the results from our core trading regions. Australia and New Zealand delivered a strong summer season, highlighted by record December sell-through at Bunnings and increased volumes of grain storage fabrics where we gained share from our competitors. The decline in full year EBITDA reflects an unfavorable margin mix from softer demand in some commercial segments during the second half despite strong top line growth. In the Americas, second half revenue was down 25% from the prior period as tariff-driven uncertainty and weaker consumer confidence impacted peak season demand. EBITDA for the region was $14.8 million, down $2.4 million from the prior year, reflecting the impact of lower revenue and margin compression on profitability. Our developing markets region continued to build momentum with growth in the Middle East underpinned by disciplined credit management and strategic project wins. EBITDA increased by 52% to $6.9 million, driven by improved margin flow and a low operating cost base. Corporate costs reduced by $1.6 million despite $5.4 million of one-off costs related to the implementation of our Microsoft Dynamics 365 ERP platform, executive leadership changes and the write-off of capitalized development costs. We recorded an FX expense of $2.1 million, primarily driven by the unfavorable movements between the U.S. dollar and Chinese yuan in the first half. So let me now take you through our trading update for the first quarter of FY '26. Revenue for the quarter was $40.2 million, down 4.5% on the prior year, with retail revenue impacted by the timing of inventory sell-in compared to the prior year. EBITDA was $600,000 lower than the prior year due largely to lower volume through our China manufacturing facility inflating transfer prices to our selling regions. Operating cash flow improved to negative $3.7 million, reflecting lower corporate costs and a reduced inventory build in the Americas. Net debt closed at $12.4 million, in line with expectations given the inventory build in Australia to support the peak trading season commencing in Q2. Looking at regional trading, firstly, in Australia and New Zealand. While year-on-year volume of our coated fabric for grain storage was lower, reflecting the exceptional grain type replenishment cycle from our customers that follow the 2024 winter grain harvest, anticipation of another strong harvest this year has driven demand above our initial expectations. Retail revenue on an underlying basis remains broadly stable, and we're well positioned for the upcoming summer trading period. In the Americas, we saw some demand resilience late in the peak summer trading season. Price increases implemented across our U.S. retail customers helped lift retail revenue by 1%. Our Commercial segment continues to perform steadily even as tariff pressures persist in related construction materials used for shade projects. Our developing markets region delivered a 3% increase in revenue, supported by increased project activity in the Middle East. This region continues to provide a strong platform for profitable growth with disciplined credit management and strategic project wins underpinning performance. On the cost side, corporate costs were down 11% versus the prior year, reflecting the benefits of our ongoing cost discipline and structural changes across the group. Importantly, our D365 ERP platform is now in place with no implementation costs in FY '26. Let me address the impact of tariffs on our Americas business and the actions we've taken to mitigate these pressures. While recent commentary has centered on tariffs introduced by the current U.S. administration, it's important to note that Gale has been managing tariffs on roughly 1/3 of our Americas revenue since 2017. Over the past 8 years, we've successfully mitigated these costs through a series of price increases to our customers. However, the additional tariffs imposed from February 2025, which also now impacts over half of our Americas revenue that previously carried no tariff have intensified the challenge and brought the issue into sharper focus for our business and also for our customers. Currently, 85% of our Americas revenue is sourced from products manufactured at our China facility, which accounts for 65% of the total output of this factory. Following the tariff changes in February, we expect an incremental $3 million in tariff costs for FY '26 with the majority concentrated in the second half of the year as we bring in inventory to support the peak U.S. trading season. Tariffs now range between 20% and 60% across our key product categories, including roller shades, shade fabric, pet beds and shade sails. These increases have a direct effect on our cost base and margin profile. To offset these costs, we've implemented necessary price increases across all U.S. retail and commercial customers. These actions have largely recovered the margin impact from the post-February tariff hikes. We continue to monitor the trade environment closely and remain focused on further mitigating risk through ongoing supply chain diversification and cost management. At our FY '25 results briefing, we identified 2 major areas for action. resetting our Americas operating model and diversifying our manufacturing footprint beyond China. Since then, we've made solid progress on both fronts. Starting with the Americas model -- operating model reset. We've completed a 24% reduction in our total U.S. workforce, focusing on streamlining administration and management roles. This has allowed us to simplify our operating structure, reduce overheads and improve decision-making speed. These changes are starting to deliver results with $3.1 million in cash savings expected for FY '26 and recurring annualized savings of $3.7 million. Importantly, we're actively exploring additional cost-saving measures to ensure we remain agile and responsive in a changing market. On manufacturing diversification, we're seeing steady progress and have reached several important milestones. Roller shade assembly trials in Southeast Asia were completed in Q4 FY '25. And this month, we successfully piloted roller shade fabric production in Thailand. These milestones mark a critical step in reducing our exposure to U.S. tariffs and strengthening supply chain resilience. Our U.S. customers have responded positively, supporting our progress and the time line for implementing these changes, which are complex. In parallel, we're actively reassessing our China manufacturing cost base given softer volumes, prioritizing warehouse consolidation and workforce optimization. This initiative is expected to deliver additional efficiency gains as we advance our diversification efforts. Looking now at our strategy. Over the past 6 months, we've sharpened our strategic direction to support sustainable growth and deliver improved returns. We've chosen to anchor our future growth around the shade category, a segment where Gale Pacific has deep expertise and one in which we currently have presence in every one of the 40 countries we serve. While our technical performance in our fabrics has established a strong market position, our next phase is about moving beyond just selling shade products to providing complete shade solutions. This means leveraging end-user insights from both consumer and commercial markets and translating them into meaningful innovation, whether through product development or content that makes the entire experience seamless from research to purchase, installation and maintenance. Our purpose is now clear, to enrich lives through shade, shaping outdoor spaces that offer comfort, protection and connection. Our ultimate vision is to make shade is fundamental to outdoor life as sunlight, protecting people, animals, crops and shared spaces so communities thrive through sustainable, intelligent and accessible shade. This clarity gives our organization a unified direction for growth. We're focusing our activity across 3 pillars: strengthening our culture with a continuous improvement mindset, high employee engagement and a strong commitment to safety, driving innovation based on end user needs with a solution-focused approach that positions our brands as the first choice for consumers and commercial partners, and pursuing growth by expanding channels in existing markets, building new product and digital partnerships and targeting climate-appropriate regions where our solutions deliver clear value. Operational efficiency and delivering sustainable profits remain central to our approach. Financially, we are measuring ourselves against 3 key outcomes: expanding margins, growing EBITDA and improving free cash flow. These priorities underpin our refined approach and will guide our decisions, ensuring we remain disciplined and focused in execution. So let's now focus on the work that we're doing with our brands and websites. Our current website and brand platform has served us well for over a decade, supporting Gale Pacific's growth and market presence. However, as we sharpen our strategy to deliver shade solutions, now is the right time to refresh and modernize these platforms to support the next phase of growth. On the brand side, our goal is to create globally cohesive and modern identities that clearly communicate who we are and what we stand for. By clarifying our brand messaging and aligning our marketing strategy with our brand architecture, we can differentiate ourselves in a competitive market and build stronger recognition with customers worldwide. For our websites, we're driving e-commerce and supporting sales growth while also strengthening brand trust and deepening customer connections. Enhanced content and data management will make it easier for consumers to research, purchase and engage with our products. And we're enabling personalization functionality to allow us to tailor the online experience to individual needs. Ultimately, a cohesive global brand and robust online presence reflect our commitment to innovation and quality, positioning Gale Pacific for continued success in consumer and commercial markets. As part of our brand refresh, we're giving each of our brands a distinct identity that reflects its unique value and purpose within our portfolio. Gale Pacific as our corporate identity, stands for protection, protecting everything under the sun with engineered fabrics and products that set the benchmark for durability and performance. Coolaroo as our consumer brand is all about shade for the moments that matter, delivering trusted comfort and sun safety for families and homeowners. And we've now established a distinct brand identity for our Commercial segment, setting it apart from the overarching corporate brand. Gale Commercial represents inspired design engineered for life, supporting professionals with technical solutions that perform in the world's harshest environments. By clearly defining and communicating these brand identities, our aim is to make it easier for customers to understand what each brand stands for and how our solutions can meet their needs. This clarity will support our strategy to deliver complete shade solutions across consumer and commercial channels. As part of this strategy to deliver complete shade solutions, we're investing in new digital platforms that will enable conversion and commerce across both our consumer and commercial channels. On the left is our refreshed Coolaroo website, which now provides a globally harmonized digital experience for consumers. The enhancement of our e-commerce capability is a key step forward, making it easier for customers to research, compare and purchase products online. Improved site navigation and expanded content make it easier for consumers to compare products, access project inspiration and find practical guidance for their outdoor spaces. The site is already live in the United States and Australia will follow in early 2026, extending the seamless and informative online experience to our home market. On the right, our new Gale Commercial platform establishes a distinct identity for our commercial brand. This site will feature enhanced technical content, detailed specifications and application guidance tailored to the needs of architects, specifiers and commercial partners. A key highlight will be the expanded library of global case studies from large-scale infrastructure and architectural projects to specialized applications in agriculture and horticulture. The platform will also connect end users directly with our commercial fabricator network, streamlining specification, project support and delivery. The site is scheduled to launch in early 2026, positioning Gale Commercial as the go-to resource for engineered technical textile and shade solutions. These investments are central to our refined strategy. By strengthening our digital presence, we are deepening our connection with end users, supporting more informed decision-making and advancing our ambition to deliver complete shade solutions. Finally, our key priorities and outlook. As we look ahead to the next 18 months, our priorities are clear and focused on driving sustainable growth and operational excellence. Our first priority is to grow share in new channels by leveraging our existing product portfolio. In the Americas, this means working to replicate the category depth and breadth we've achieved in our more mature Australian business. In Australia and our developing markets regions, we're focused on expanding our presence within the agriculture and horticulture segments, building on established strengths and targeting new opportunities for growth. Second, we're accelerating our manufacturing diversification program and optimizing our China manufacturing cost base. These actions are critical to reducing risk, improving resilience and supporting margin expansion in an evolving global trade environment. Third, we're committed to driving cost efficiency by removing duplication and waste from our operating model. Streamlining processes and structures will help us to deliver improved profitability and greater organizational agility. Finally, we're deepening our connection with end users in both consumer and commercial channels. By enhancing engagement and understanding, we can deliver more relevant solutions and reinforce Gale Pacific's reputation for engineered performance. Turning then to the outlook. We're well placed to capitalize on seasonal demand in Australia with preparation now complete to maximize performance during the peak summer trading period. In the Americas, we continue to navigate a very complex environment where elevated tariffs and ongoing uncertainty are impacting retail shelf prices and consumer behavior. Despite these headwinds, our teams remain focused on adapting to market conditions and protecting profitability. In the Middle East, project activity remains solid, providing a sound foundation for growth and supporting our broader revenue diversification strategy. For the first half of FY '26, we expect EBITDA of approximately $4 million. We anticipate improved performance in the second half as the benefits of the U.S. operating model reset begin to take effect. Further performance guidance will be provided to shareholders in our quarterly and half year results updates. So finally, I just want to highlight the decisive actions that we've taken to stabilize our financial performance and to set Gale Pacific on a stronger footing for the future. The comprehensive reset of our U.S. operating model has been a significant undertaking. By streamlining our structure, reducing overheads and simplifying processes, we're improving our responsiveness and positioning our Americas business to better navigate market volatility. We're also addressing the margin impact of U.S. tariffs on imports from China, implementing targeted price increases for our customers in the Americas. These measures have helped to largely recover lost margin and protect profitability even as trade pressures persist. Our work to diversify our manufacturing footprint outside of China will also assist in managing risk. Our growth-focused strategic direction towards providing shade solutions is now embedded throughout the organization. Every team member across our group is empowered to make decisions that support our objectives, ensuring alignment and consistency in execution. We remain committed to simplifying our operating model, removing duplication and waste to drive productivity and enhance organizational agility. This disciplined approach will deliver tangible improvements in efficiency and cost management. But above all, our focus is on driving growth, delivering sustainable profitability and improving returns to shareholders. We're confident that the actions taken and the strategy now in place will support long-term value creation. In closing, I'd like to sincerely thank our Board of Directors for their ongoing guidance and support and extend my heartfelt appreciation and gratitude to the entire Gale Pacific team for their commitment and resilience in advancing our goals. I also want to thank our shareholders for your continued support of our company. Together with my team, I'm committed to delivering the improved financial performance that you rightly expect. I'll now hand back to David to conduct the formal business of the meeting.

Thanks, Troy, for a very comprehensive presentation. The first item of business of this meeting is consideration of the audited financial statements and related reports for the year ended 30 June 2025. The Corporations Act requires that the audited financial statements and related reports for the 2025 financial year be considered at the meeting. These reports were made available to shareholders in August. Although shareholders are not required to formally vote on these reports, I welcome any discussion or questions on the reports. Are there any questions or comments on the company's financial and related reports for the year ended 30 June 2025? Sophie, do we have any online questions? No? If there are no questions, I ask the Company Secretary to record that the audited FY '25 financial and related reports have been received and considered by shareholders. The next item of business, Resolution 1, is a nonbinding resolution to adopt the company's remuneration report, which is set out in the company's 2025 annual report. The vote on this resolution is advisory only and does not bind the directors. However, the Board will take into account any discussion on this resolution and the outcome of the vote when considering the future remuneration policies and practices. The resolution and details of the valid proxy votes on the resolution appear on the screen behind me, and I will take these as being read. Are there any questions on this resolution? Anything? I now put the resolution and ask that you complete your poll voting card for Resolution 1. I will now move to Resolution 2. The next item of business, Resolution 2, relates to the reelection of Peter Landos as Director. Peter's qualifications, background and experience are summarized in the company's 2025 annual report. The resolution and details of the valid proxy votes on the resolution appear on the screen behind me, and I will take these as being read. Are there any questions on this resolution?

I wonder what to [indiscernible] achieve in the next 3 years as a director?

Well, as you know, in the last 12 months or so, we've gone on a significant change with Troy's appointment to CEO. And as you'd be aware, I'm the Chief Operating Officer of the Thorney Investment Group, which is also the largest shareholder. So the interest of Thorney are very much aligned with all of the other shareholders. And as David commented at the beginning of his address, we're not thrilled with the performance of the company in 2025. And so I'm looking forward to working with Troy and Dexter also joined the company in the last 12 months in restoring shareholder value. So that's my sort of personal and company ambition for the next 3 years.

The next item of business, Resolution 3, relates to the approval of the company's performance rights share plan for the purposes of the ASX Listing Rules and the Corporations Act. The resolution and details of the valid proxy votes on the resolution appear on the screen behind me, and I will take these as being read. Are there any questions on this resolution? I will now put the resolution and ask that you complete your poll voting card for Resolution 3. Before we move to the poll procedure, are there any other questions that any shareholder would like to ask?

[indiscernible] Troy's presentation where he was talking about cutting costs in the U.S. market, and I'm mindful of the growth expectations that might have been in the U.S. And is there any cost for the growth plans from cutting those costs out of the U.S.?

I'll let Troy respond.

Yes. Thank you for the question. So the costs that we've taken out over the first half have been really centered on administration and management roles. So we've kept the revenue-generating part of the business current. And so that's -- you start cutting some of those costs, then your ambition to be able to grow starts to diminish. So we've just chosen to try and simplify how we operate and trying to get some level of harmonization, particularly across our 2 largest markets, and that's where we've seen an opportunity for us to be able to do that. So we think with this refined strategy that we've got enough costs in the business to be able to execute against that strategy because what we'll be doing is diverting costs from other initiatives that doesn't exactly align with that towards now growing towards shade solutions. So in the short term, we expect to see no additional costs to really drive that new strategy forward.

It's worth mentioning that following on that Troy's comment that we have managed to reduce costs across administration, but we have, in fact, recruited in the area of product innovation. So although we're cutting costs on a net basis, we continue to invest in that market. Any other questions?