Gale Pacific Limited (GAP) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Gale Pacific Limited 1H FY '20 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. John Paul Marcantonio, Chief Executive Officer. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us on the call this morning as we discuss our half 1 financial year '20 results for Gale Pacific. We'll take a bit of time discussing an overview on the environment leading up to the results, talk about some drivers of those results. And then I'll hand over to Domenic Romanelli, our CFO, to discuss the results in more detail and also take us around the individual results for the regions. And then I'll come back on at the end to outline our strategy and provide some insight into our outlook for the back half and the full year. And then happy to take any questions after that point in the discussion. So Slide 4 is an overview of the results for the front half of this financial year. We had challenging trading conditions in MENA as we've previously announced, and we had an unforeseen provision that impacted the half 1 results for the company. Group net revenue was at $62.3 million, which was down 8% on the prior corresponding period. Net loss after tax of $2.6 million versus an NPAT of $1.5 million positive in half 1 prior year. Pleasingly, in Australia and New Zealand, net revenue was up nearly 6%, at 5.9%. We had some growth in our retail business and our consumer categories that offset some challenges in our commercial business and then also offset the challenging weather and environmental conditions in the region as well. Americas net revenue was down just about 27%, the primary driver of which was a non-repeat of a stock build for a major new customer program win in the prior year. Eurasia, up 10.6%. We've won new business on large-scale commercial projects. We've added some additional ranging, and we've also expanded into new markets in the Eurasia region as well. The Middle East/North Africa was down 17% in the front half. And that was primarily due to project spending shifting, the overall general tensions in the region, and the tightening of our Gale Pacific credit policy in that region. Operating cash flow came in at negative $3.6 million. And as of date, our capital management policy remains unchanged as does our dividend policy, which remains unchanged. There will be no interim dividend declared in half 1 of the financial year FY '20. And despite these challenges, our underlying business does remain healthy, and we believe there's significant runway for growth despite these near-term challenges and headwinds, and I'll outline those for you on the rest of the call. Slide 5 outlines in some more detail the drivers of the front half result. Australia/New Zealand, the company returned to growth in the front half, as I've mentioned. We won new ranging in our consumer business in the retail sector in the front half of the year, and we saw increased sell-through in our core categories in retail as well. Parts of our coated fabrics business grew as well even though we had some negative conditions relative to our agricultural and tarping products in the grain cover business due to the continued drought conditions. And as we previously mentioned, the provision as well as the significant weather and environmental challenges impacted the front half part of the year but pleasingly, overdriving due to the growth in retail. The MENA challenges we discussed, I think, in pretty good detail. Deferrals and the reallocation of spending on government projects and infrastructure projects in the front half, coupled with the tensions and the tightening credit policy, really drove the result there. As it relates to the Americas result, we did have a non-repeat in this period of the stock build that was associated with the major new customer win in the prior corresponding period. As we talk about the Americas results, you'll see there's some pretty -- there's some relatively positive news coming on the underlying business in the Americas, but the scale and the significance of that onetime stock build associated with this major win was the primary driver for the revenue result. We've also continued to experience tariff's pressures on China goods entering the U.S. in the front half of the year, and we expect those to continue in the back half as well. As I mentioned, the underlying business, we've seen sell-through rates at our core customers and our core consumer categories above and sometimes significantly above our core customer growth rates, which is very pleasing and encouraging. We have achieved new retail placements in the front half of the year, and there will be new retail placements in the back half of the year as well. We've entered new markets. Our innovation pipeline is coming to market and launching in many parts of the world, and there are many new product initiatives that are also coming to market both in the first half and the coming periods as well. So now I'd like to turn the call over to Domenic Romanelli, our Chief Financial Officer, who will take us through a more detailed summary of the front half results. Dom?

Thanks, John Paul. As John Paul mentioned, our net revenue was down $5.5 million, 8% when compared to the first half of the 2019 financial year, dropping from $67.8 million to $62.3 million, and that's impacted our earnings and profit before tax where in first half of last year, we ended up with a $1.3 million profit before tax, but this half a loss of $3.6 million. And there's truly 4 key reasons why that's taken place. The first is the challenging environment in the Middle East that we've touched on. The second one was around unforeseen requirement to make a significant provision within our Australia/New Zealand business in relation to our major customer. We've had the cost pressures associated with the import tariffs in the United States and the non-repeat of a stock build associated with a major customer win in the prior half of last financial year. Pleasingly, our net debt was lower than December 2018 by $1.1 million at a figure of $23.6 million but the lower profit reflected in our earnings per share, a loss of $0.95 per share compared to a $0.51 positive per share in the first half 2019, and that all resulted in no interim dividend being declared in the first half of this financial year. Moving on to Slide 8. Pleasingly, our cash flow for the first half this year was better than the first half last year. And also, it's worth remembering that we are heavily skewed to the second half year when it comes to our cash flows due to the seasonal nature of our business in the Northern Hemisphere's summer, and that will reoccur this financial year. Moving on to Slide 9, and particularly the Americas region. Our underlying business growth offset by the stock build in the prior half and continued import tariff impact to this half. So when we look at the profit before tax and the loss that we incurred in this region, predominantly, the main reason is that stock build that we had in the first half. So net revenue was down $27.4 million (sic) [ 27.4% ] and our EBITDA down $2.9 million. We've spoken about the stock build, but there are new ranging and new product placements secured in both the first half of this year and the second half of this financial year. Above market category and customer growth rates in sell-through across not only the brick-and-mortar area, but also the eCommerce core categories. Import tariffs remain for portion of the portfolio that we had minor reductions in some of our tariffs, some of them going from 15% to 7.5%, and pleasingly with the new tariffs that were being proposed have been deferred at the moment, not expected to come in, in this financial year. Measures to offset, including -- there are measures to offset, including pricing, efficiencies and growth programs, and we are investing in line with the strategy to more quickly grow the Americas region. Slide 10 on the Australia/New Zealand business. We've seen growth in consumer business that have been offset by weather and environmental challenges and the incentive arrangement that we spoke of. And if you look at the profit before tax moving from the $1.7 million for the first half of last year to the $1.2 million this half, the predominant reason for that has been this incentive arrangement that we've spoken about. This new product licensing incremental ranging, core consumer categories driving growth and this positive underlying demand increases through sell-through process in core categories. As spoken about the significant unforeseen provision and the challenging weather and environmental conditions in Australia with drought conditions impacting the agricultural commercial coated fabrics categories. Growth in coated fabrics ranges used in the manufacture of water containment applications have occurred including a major new customer win secured in the second half of the 2020 financial year. Slide 11, Middle East. We've seen trading results impacted by the ongoing challenges in macro conditions, what is taking place in the region, and the tighter credit policies that we have adopted in the latter part of the 2019 calendar year in trying to improve our debtor's book. And the underlying demand affected as funding for projects consuming Gale Pacific commercial fabrics have been deferred, delayed or channeled to other investments within the region. We've spoken about the credit policy we've put in place, which has just started to improve our debtor's book, but the Middle East continues to be an attractive and important market for Gale Pacific and its continued investment into product innovation and market development in the second half of the 2020 financial year. Slide 12 Eurasia. We've seen incremental project wins and focus on expanding our distribution for commercial fabric ranges. This expansion to new markets with shade solutions has taken place in the first half of the 2020 financial year and addition of new distribution partners and additional ranging with existing core customers. Regional growth plan to include further commercial fabrics distribution expansion and large-scale shade and asset protection projects conversions are to take place. And with that, I'll pass back to John Paul to talk about the strategy and the outlook for the organization.

Thanks, Dom. I'd like to first discuss our core strategy on Slide 14. And that is to build Gale Pacific into a more quickly growing world-class global fabrics technology business. We've taken steps to that end over the last period, and we'll continue to do so moving forward. The reason why we feel confident in this being part of -- this being the core strategy for the company is because there's underlying wins that -- some of which Dom highlighted and some other ones I'll share with you. Product innovation is at the core of that strategy. And we are developing and launching new products that have meaningful new benefits that are new to world and that are unique to Gale Pacific, an example of which is on Slide 15, which is our new range of flame-retardant architectural shade fabrics that is currently launching and rolling out across the world with more products to be rolled out in the back half of this financial year. Early reads on these new fabrics are very positive as well. We are growing our categories, and we'll continue to do so. The best ways to drive growth for both Gale Pacific and our partners is to develop our categories to attract more users of our products, inspire them to use them more often and introduce new benefits that they're willing to pay more for. We've seen evidence of that over the course of the last few years inside our business. We've seen that in the front half of this year, and we believe we're going to be able to accelerate that as we move into the back half of this year and into subsequent years. I mentioned earlier that we've seen sell-through results that are above category and customer averages. As we enter the back half of this year, we'll continue to focus on that and accelerate the amount of product that goes through the doors of our retail partners, our commercial distributors and our commercial fabricators, specifier partners and bring them on to more end users for usage in the market. The best way to grow with our partners is to accelerate the amount of material and the amount of product that they're selling through into consumers and commercial end users, and we'll continue to do that over time. As I mentioned, we're doing those piece as well. We should be earning the right to get new ranging and more availability across the market both in those that we serve and those that are new to us. We'll focus our internal efforts on operations -- on our operations and supply chain. We will match our operational footprints and our supply chain to the market demands while driving greater levels of efficiency, productivity and quality improvements. And I think we've taken some steps here over time, but we'll continue to accelerate that work over the coming periods as well so that as we develop and accelerate the growth curve for the company, our operational footprint is aligned to be able to match and serve our markets more efficiently, those are the -- to manage the growth most effectively with our partners. As I mentioned a few months ago, we'll also explore new geographies and locations for Gale Pacific product to be sold and used. We'll do that by leveraging this new product innovation capability that we're bringing to market and also work on taking this category development capability into those new markets that will allow us to expand the footprint and the distribution path for Gale Pacific but also help our new partners and existing partners in some of those new geographies grow as well and as a consequence of that work. So as we look into the back half of this year and the full year outlook for the financial year, as Dom had mentioned, as with previous year's, profit delivery for the company will be skewed to the second half of the financial year. Unlike previous years, however, there are significant macro market factors that are expected to significantly influence the results for both the back half of this year and to the full year financial '20 -- financial year 2020, excuse me. As we mentioned, there are developments in the trade climate between the U.S. and China. We expect those to continue to impact the second half financial year '20 profitability. The challenging trading conditions and overall tensions in the MENA region are expected to continue into the second half of financial year '20. As it relates to the COVID-19 coronavirus outbreak, we have experienced disruption to our supply chain and operations in China due to that -- due to the outbreak. And we expect that, that disruption will persist for some meaningful portion of the second half of financial year '20. The company does expect that both half 2 and full year financial year '20 profits remain positive but to be lower than prior year. Thus -- though we're experiencing these short-term challenges, we remain confident in the core strategy, as outlined. We're working diligently around the world to offset these near-term headwinds. Many of our initiatives, as I outlined, are yielding positive outcomes. The underlying demand from much of our business and our categories remains strong, and our overall business health is positive. We've earned new ranges, we've earned new placements with new customers, and we're launching new products, and we're seeing very strong sell-through performance of our core business. Unfortunately, the scale of the short-term and near-term macro headwinds is pretty significant. So with that, I'd like to wrap up and ask if there's any discussion or questions from the group.

[Operator Instructions] Your first question comes from Peter Bell from Bellmont Securities.

John Paul, a couple of questions. You mentioned there's -- I'll start with the Americas side. You mentioned that you are still seeing some underlying growth and the declines from the prior period was due to that additional sort of stock build in the prior period. Can you give us a bit of an idea about what sort of metrics we can see to actually see that underlying growth in the numbers?

Thanks, Peter. Thanks for joining the call, and thanks for your questions. I appreciate you taking the time to join us. So when I speak for sell-through rate increases, I think that's the most important measure of underlying health of our business. The best way to ensure the short, medium, and long-term growth and health of our company is to make sure that we're not only delighting our customers by selling them more product, but that we're delight consumers and end users so that they buy it out of our customer partners. And so when I referenced growth and sell-through rates, we're seeing significant improvements in those sell-out rates at some of our -- some of the largest retailers in the world. And those seem to be accelerating into the front half of this year, which is a really pleasing sign. And when I say accelerating, if you're building for a sense of scale, we're well into the double-digit year-on-year growth rates of products coming out the door in many of our core categories with those customers.

Okay. That sounds good. Just back on the Australian business for a moment. It was positive to see some decent revenue growth there, but pretty surprising, I suppose, to see such a fairly meaningful decline in profitability. Now the point that you call out there was that incentive. Just struggling to understand how an incentive can be so meaningful that it takes positive sales growth to negative profit growth?

Yes, Peter, this is a bit of a -- it's a good news and bad news story, unfortunately. The reason why the incentive arrangement was there was because of the growth we are driving. And so we've got work to do to review those -- some of those arrangements and make sure that they're mutually beneficial for both our partners and Gale Pacific. I think that the good news is that the revenue growth is based on not only increased placement in this market, but also really strong initial sell-through of that innovation and new product in this market, which is really encouraging. And the other portion of the growth here that is worth noting is our -- a lot of our core business is not new placements or new products. We saw positive growth rates as we were ending the half 2. So there's some really good underlying benefits and signs in this market. Unfortunately, we did have that issue, and we're addressing it appropriately.

Okay. So there's still a few of those large, perhaps excessive incentives in the market at the moment? Or are they sort of been a washer in the first half already?