Gale Pacific Limited (GAP) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the meeting. I am David Allman, Chairman of Gale Pacific Limited. It is now past 10 a.m., and I am advised that we have a quorum present. I now officially declare open the 2020 Annual General Meeting for Gale Pacific Limited. Allow me to begin by introducing my fellow directors and the management team. We have on the call today, John Paul Marcantonio, our Chief Executive Officer and Managing Director; Peter Landos, a Non-Executive Director; Donna McMaster, a Non-Executive Director; Tom Stianos, a Non-Executive Director; Domenic Romanelli, our Chief Financial Officer; and Sophie Karzis, our company Secretary. Also in attendance today are the company's auditors, Deloitte Touche Tohmatsu, represented by Gen Cavallo, the partner responsible for auditing Gale's accounts for the financial year ended 30 June 2020. I also welcome Angela Liapis representative of our share registry, Computershare Limited. I will now move on to the procedural matters of the meeting. The notice for this Annual General Meeting was circulated to shareholders within the required period, and copies of the notice are available online. If there are no objections, I would like to move that the notice be taken as read. I would like to describe the voting procedures that will apply to this meeting, which is being held online via the Lumi web platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can hear the speeches and watch the presentation slides via a live webcast of the meeting. In addition, shareholders and proxies may ask questions and submit votes using the Lumi platform. This is our first virtual AGM and maybe the first to many of you, as indeed, it is for me. The Board appreciates your efforts to navigate this new technology and to participate online this year. At this meeting, there will be 5 items of business, including 4 shareholder resolutions. Each resolution will be proposed and voted on as a simple majority to be carried by way of a poll. There have been proxies received in respect of today's resolutions. As I read out each item of business at today's meeting, the total number of valid proxies received for that item and the manner in which those proxies have been directed will be displayed on the screen. These figures will be as at the closing time for receipt of proxies, which was 10 a.m. on the 21st of December. In my capacity as Chairman, I will be voting all available and directed proxies in favor of each item of business. Questions can be submitted at any time by clicking the speech bubble icon. This will open a new screen. At the bottom of the screen, there is a section for you to type your question. Once you have finished typing, hit the arrow symbol to submit. Please note that while you can submit questions throughout the meeting, I will only address them at the relevant time in the meeting. Please note that your questions may be moderated or amalgamated if they relate to a similar topic. At the appropriate time, I will call on the company secretary to read the questions to me. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. At that time, if you are eligible to vote, a new polling icon will appear on your screen. Selecting this icon will bring up a list of resolutions and present you 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 may change your vote up until the time I declare voting closed. The poll voting will be counted by the share registry and the results of the poll will be notified to the ASX and published on the company's website following the meeting. I confirm that polling on the resolutions is now open. The 12 months to 30 June 2020 were an eventful and extraordinarily challenging period. First half trading conditions were very difficult as reflected in a disappointing $3.6 million pretax loss for this period. The second half of the financial year was, of course, greatly affected by the COVID-19 pandemic. I am pleased to report that the management team responded quickly and professionally to the challenging operating environment with a primary focus on health and safety, and also delivered revenue growth and solid profit in the second half, especially in the fourth quarter. Overall, FY '20 revenue was $156.3 million, an increase of 4.8%. However, due to the disappointing first half, profit before tax of $4.8 million was well below prior year's $11.2 million, and earnings per share declined 58% to $0.013. The result was impacted by increased costs due to pandemic-related safety requirements, tariffs in the U.S. for goods made in China, input cost increases and onetime expenses associated with a restructure of the Australian business as well. Operating cash flow was $7.2 million, down 53% on prior year. Net debt was $15.3 million at 30 June 2020 versus $10.9 million for the prior corresponding period due to increased working capital, resulting from strong fourth quarter trading and $2 million of share buybacks. As a prudent response to the first half loss and the challenges being posed by the pandemic, the Board elected not to pay an interim dividend, but did declare a final dividend of $0.01 per share unfranked, thanks to the positive momentum throughout the second half. Moving on to some management team appointments. John Paul Marcantonio was appointed Chief Executive Officer on 29th of November 2019. For the 2 years prior to his appointment as CEO, John Paul served as President and General Manager of Gale's Americas business and also led all global innovation functions for the company. Based on his performance in those roles and given the Americas' significant and growing contribution to overall company performance and our strategy to develop a larger business in the United States, the Board determined that John Paul was the right choice to lead Gale into the future. John Paul also joined the Board in August, thereby becoming CEO and Managing Director. The appointment recognized the strong leadership and skillful management that he and his senior leadership team have demonstrated throughout this challenging period. Other key management appointments made during FY '20 include Domenic Romanelli as Chief Financial Officer and Troy Mortleman as General Manager for Australia and New Zealand. I'm pleased to say that the progress made during the second half of FY '20 placed Gale in a strong position entering FY '21 and I believe that our first half profit guidance upgrade announced in November affirms this. Despite the challenges, we continue to execute on and invest in our strategy of building Gale into a fast-growing global fabrics technology business. While John Paul will detail our response to the COVID-19 pandemic later in his presentation, I would like to thank the entire Gale Pacific team who responded quickly and professionally to enable global operations to continue safely. It is a major challenge running a global business without the ability to travel and meet face-to-face with staff, customers and suppliers. I'd also like to thank our customers for their loyalty and patients throughout the year and acknowledge the continued support of our shareholders during what has been a digital period. Finally, and on behalf of the Board, I'd like to thank all our employees for their excellent and committed work under very difficult conditions. I will now ask John Paul to present his CEO and Managing Director's report.

Thank you, David, and good morning, ladies and gentlemen. We appreciate you joining us today. I'm honored to speak with you about our company, our business performance, our team and our outlook. At the last year's meeting, I highlighted that the foundational work we've done to transform Gale Pacific into a healthy, stable company, capable of delivering and sustaining growth had positioned us well for the future. I stated that we were entering the beginning of the growth phase for the company and that we focus our efforts to grow our business, our customers' businesses, our brands, our categories and our people. I said that we have achieved this by growing the size, scale and profitability of our core product categories, in both consumer and commercial applications and that we would further expand distribution. I said that we would increase our focus on new product innovation and further improve our manufacturing and operations to match the conditions and demands of the market and the needs of our evolving customers globally. Little did we know of the challenges that awaited us just beyond the turn of the new year. Today, I am pleased to say that we are largely on track with our growth agenda, despite the unprecedented, highly dynamic and historically challenging operating environment of 2020. This year has tested and ultimately proven the worth of our business transformation and global growth strategies. We weathered the major impacts posed by the global pandemic and simultaneously delivered revenue growth in FY '20 with increasing momentum throughout the fourth quarter. This momentum has continued into the first half of the 2021 financial year. I'm pleased to say that our core global business is healthy, stable, profitable and growing. We remain committed to and continue to make progress against our core growth strategy of building Gale Pacific into a faster growing, world-class global fabrics technology business. We are market-leading, vertically integrated manufacturers and innovators of technical fabrics used in consumer and commercial applications around the world. We've launched meaningful, innovative new products across our core consumer and commercial categories over the last year. We focused on driving category growth by expanding distribution and accelerating sell-through rates in the United States and Australia, our anchor markets. We've made meaningful improvement -- improvements in our manufacturing and global operations and have increased capacity and improved service while working diligently to offset cost inflation over the last year. We've worked to grow global distribution and have early positive signs of expanding our business into new markets for some of our core categories despite pandemic-related restrictions and constraints. We're encouraged by the progress we've made against this strategy over the last year. The 2020 financial year was made up of 2 very different halves. After reporting a $3.6 million loss before tax in the first half, we were able to swiftly capitalize on a significant positive shift in consumer purchasing behavior that benefited retail sales in the United States and Australia in the second half, particularly in the fourth quarter. Our partner retailers in both countries experienced increases in sell-through across do-it-yourself product ranges as retail customers increased spending across home improvement categories. Our brands and products are well positioned for this shift, and we've realized additional benefit from securing incremental new ranging both in-store and online. As a result, we were able to drive sell-through rates for our core categories, generally stronger than market and category averages across most major customers. Our teams worldwide rose to the challenge posed by the significant growth in demand by increasing capacity to serve while contending with the complexities presented by the pandemic. As a result, we grew second half revenue by 15.6% to $94 million and delivered profit before tax of $8.4 million for the half. We delivered revenue growth in 3 of our 4 selling regions in the 2020 financial year and have distinct plans for the coming periods in each of them. In the Americas, we've accelerated our market development and business expansion plans to focus on building a larger footprint in this critical growth market across the coming years. In Australia and New Zealand, we're focused on driving profitable growth initiatives across retail and commercial sectors, delivering operational efficiency and better matching capacity to demand. In Eurasia, we're focused on growth initiatives to expand the usage of our core differentiated commercial fabrics ranges and to increase distribution across targeted markets. And though the markets of the Middle East and North Africa continue to be challenging, we remain committed to our partners and are hopeful of returning to growth over the coming periods. I'll now briefly detail our FY '20 performance in our operating regions. Firstly, the Americas. Revenue was up 3.2% on prior year, driven by strong sales momentum in the second half, particularly the fourth quarter, resulting in a record second half regional revenue. Successful new product placements, expanded distribution through e-commerce and retail partners, and the aforementioned positive shift in consumer purchasing behavior were the primary drivers. We secured incremental points of distribution across the retail landscape, increased item counts across core brick-and-mortar locations and added new listings across e-commerce partner sites. Our core ranges and new products resonated well with consumers as evidenced by strong sell-through rates across the U.S. market at nearly all retail partners, a trend that continues into the first half of FY '21. Though broad market demand was down, our commercial fabrics ranges and customers remain an important part of our growth strategy in the region over both the short and long term. We continue to incur additional costs in the form of U.S. import tariffs for goods manufactured in China throughout the year. And though conditions stabilized, the tariffs remain in place. Cost inflation in material, freight, transportation, labor, and greater health and safety requirements due to the COVID-19 pandemic also had an impact. We've continued to implement cost saving and productivity initiatives to offset the headwinds while continuing to invest in selling, marketing and service infrastructure to fuel the Americas growth plan. Moving now to Australia and New Zealand. Revenues grew 11.4% for the year due to growth across both the retail and commercial categories, with momentum building throughout the second half. Growth in the retail sector was driven by successful introductions and sell-through of a significant number of new retail products in our core consumer categories, coupled with the demand increase associated with changes in consumer buying behavior due to COVID-19 restrictions. Our new products, core categories and brands are well positioned as consumer spending continues toward a focus on home improvement, as evidenced by strong sell-out rates that continued into the first half of FY '21. In commercial, we secured new distribution for core coated fabrics ranges, launched new commercial knitted and coated fabrics and saw increased demand for our core coated product ranges used in agricultural, water management, food handling and packaging applications. Of note are the record volumes for our core coated fabrics used in grain handling applications, a trend that started in the second half of FY '20 and has significantly accelerated through the first half of FY '21. Finally, we implemented a restructuring plan in June of FY '20, designed to deliver profit and revenue expansion in FY '21 and beyond. We're committed to and energized by the opportunity over the coming periods in the ANZ region. Turning now to Eurasia. The 8.1% increase in revenue was driven mainly by large-scale commercial projects using our core architectural fabrics as well as distribution expansion. The region's performance was pleasing, considering the challenges across both Europe and Asia associated with the pandemic throughout the year. In line with our strategy, we'll continue to expand the use of our core differentiated commercial fabrics and increase distribution across targeted markets in Europe and in Asia in the coming periods. And finally, the Middle East and North Africa. Revenue declined 18.6% in FY '20 due to challenging macroeconomic conditions and overall instability in the region, coupled with our decision to tighten credit policy. The pandemic had a negative impact on our business due to varying degrees of restrictions and market openness across different countries throughout the second half. Provisions for doubtful debts, reflecting these difficult local conditions also had a material impact on profit before tax. Unfortunately, these conditions persist into the first half of the 2021 financial year. Despite these difficulties, we remain -- we continue to support our partners in the region and remain optimistic about returning to growth over the coming periods. I'd now like to cover our response to the COVID-19 pandemic. Throughout the pandemic, our primary concern has been ensuring the health and safety of our employees around the world. This has not changed and continues to be our primary focus today. We responded quickly and acting flexible work-from-home policies, many of which are still in place today and continue to evolve as appropriate. We quickly developed and implemented strict facility-specific safety and hygiene protocols across all global locations and have continued to update and refine these practices to this day. Our operations in China were directly impacted throughout February and into March, but largely returned to full production and service capacity by the start of April and increased production capacity throughout the fourth quarter. I'm pleased to report that we've had no further interruption to production at our China facility relating to the COVID-19 pandemic and have continued to expand capacity. Our team there have done an exceptional job. We've worked diligently to prioritize and maintain a high level of safety while continuing to service our customers throughout this very challenging period. And I would like to thank our entire team for their commitment and their dedication. We remain committed and continue to execute on our core strategy of building Gale Pacific into a faster-growing world-class global fabrics technology business. Our business and our team have proven highly resilient this year, and I have confidence in our ability to manage this complex operating environment moving forward. As outlined, the progress that we've made during the second half of FY '20, coupled with the significant positive macro shifts in our core markets, placed us in a strong position entering FY '21. In early November, we announced upgraded profit guidance for the 6 months to 31 December 2020 and stated that we expected profit before tax to be in the range of $7 million to $9 million. Today, I can confirm that we expect profit before tax for the first half of FY '21 to be at the upper end of that range. We are encouraged by our performance to date and are hopeful that these mostly encouraging trends will continue throughout the 2021 financial year. I would like to take this opportunity to thank our consumers, our customers, our suppliers and our shareholders for their continued support throughout this very challenging year. I would also like to thank our Board for their counsel, confidence and decisiveness over the last 12 months in addition to their continued support of our team and of our growth strategy. And finally, I would like to personally thank our entire Gale Pacific team for their commitment, collaboration, dedication and hard work during this historically challenging year. I'm proud of our performance, and I'm honored to work alongside each of you to deliver it. Thank you all very much, and back to you, David.

Thank you, John Paul. And now to the formal business of the meeting. The first item of business of this meeting is consideration of the audited financial statements and related reports for the year ended 30 June 2020. The Corporations Act requires that the audited financial statements and related reports for the 2020 financial year be considered at the meeting. These reports were made available to shareholders on the 25th of August 2020. Although shareholders are not required to formally vote on these reports, I welcome any discussion or questions on the reports. I will now ask our company secretary to advise whether any questions have been received in relation to the annual report or arising from either my address or John Paul's presentation. Sophie, are there any questions?

No questions received, David.

Thank you. I now ask the company secretary to record that the audited FY '20 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 2020 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 of the company. The resolution and details of the valid proxy votes on the resolution appear on Screen 1, and I will take these as being read. I will now ask our company secretary to advise whether any questions have been received in relation to this resolution. Sophie, any questions?

No, sir. No questions, Chairman.

Thank you. I now formally put this resolution to the meeting. As mentioned earlier, this resolution and all other resolutions will be voted by way of a poll and polling is now open and will remain open until the end of the meeting. I now move to Resolution 2. The next item of business, Resolution 2, relates to the reelection of Tom Stianos as a director. Tom was appointed as a Director of the company on the 17th of October 2017 and retires as a Director in accordance with clause 7.1 (f) of the constitution of the company and being eligible under clause 7.1 (h) offers himself for reelection. The resolution and details of the valid proxy votes on the resolution appear on screen, and I will take these as being read. I will now ask our company secretary to advise whether any questions have been received in relation to this resolution. Sophie, any questions?

No questions, David.

Thanks, Sophie. I now formally put this resolution to the meeting. Resolutions 3 and 4 relate to contractual arrangements between the company and the Chief Executive Officer. John Paul Marcantonio was appointed to this role on 29th of November 2019, while remaining based in Florida and retaining direct control of the Americas' business and his responsibilities for product innovation. As we have heard, he inherited a difficult trading situation with a loss reported for the 6 months to December 2019, and this was then compounded by the challenges of the COVID-19 pandemic. At this time, John Paul and the Board agreed that it will be in the best interest of both parties to put in place a 3-year incentive arrangement to give John Paul an appropriate time frame to plan for and realize the full potential of the business. As part of this arrangement, John Paul has given up his annual short-term cash incentive and the annual issue of performance rights until financial year 2024 in return for the issue of performance rights, which vest in July 2023 based on total shareholder return achieved over that period. The Board believes that we have put in place arrangements which are highly beneficial to Gale, and I submit that the performance of the business under John Paul's leadership supports this view. I will now move to Resolution 3. Resolution 3 pertains to the approval of issue of performance rights to the Chief Executive Officer and Managing Director, John Paul Marcantonio. The Board has decided to issue 14 million performance rights to John Paul under the terms of the company's performance rights, share plan, and the issue is subject to shareholder approval at this AGM. The resolution and details of the valid proxy votes on the resolution appear on screen, and I will take these as being read. I will now ask our company secretary to advise whether any questions have been received in relation to this resolution. Sophie, do you have any questions?

No questions, Chairman.

Thank you, Sophie. I will now formally put this resolution to the meeting. I will now move to Resolution 4. The next item of business, Resolution 4, relates to approval of provision of termination benefits to Chief Executive Officer and Managing Director, John Paul Marcantonio. Shareholders are asked to approve the giving of benefits to John Paul in connection with his ceasing to hold office or position of employment in Gale Pacific Limited or related audit corporate. The resolution and details of the valid proxy votes on the resolution appear on screen, and I will take these as being read. I will now ask our company secretary to advise whether any questions have been received in relation to this resolution. Sophie, any questions?

No questions on this resolution, Chairman. But we do have a general question, which you might want to address after all the business is done.

Okay. Happy to do that. I will now formally put this resolution to the meeting. All resolutions at this meeting have now been put to shareholders. Before I close the polling, I will now address any general questions received in relation to the company. And Sophie, you have a question?

I do. I had a question from a shareholder. What excites John Paul most about product innovation?

I'll hand that over to John Paul, I think.

In the interest of time, I spent quite a bit of time talking about that answer but thank you whoever posed the question. One of the phrases I made earlier in my address was that we're vertically integrated manufacturers and innovators of our -- in our core categories. And the largest joy, I think we get as workers of this company that I get to do that work is to be able to delight either a consumer or commercial or professional end user with the benefits we can provide with some of our core fabrics. We're solving large challenges across agricultural environments, applications as well as at home, protecting pets, children, assets. And so it's an honor to be able to do that. And I think our teams in the United States, China, Australia and really around the world, they've done a really wonderful job of not only leveraging the core competencies we have in place but bringing new benefits to the market through those core competencies. And an example of that is our market-leading range of flame retardant architectural shade fabrics, which we provide globally right now. And so I'm energized not only about the work we've done, but the possibilities that will come to the market to do those jobs over the coming few years.

Thank you, John Paul. I'd just add from the perspective of the Board, we see product development as the lifeblood of the future of the business. We want to see a very strong pipeline of new products to -- due for release over ensuing financial years. And it's worth commenting that a significant proportion of the increased revenue that we've been enjoying for the past few months is due to new product launches and new listings that wouldn't be happening without notice. So we, as a Board, consider it very important. I know John Paul does, and he's been doing an excellent job in managing our product innovation for the last 3 years now. Sophie, are there any other questions?

No, David. That was all.

Thank you. Ladies and gentlemen, that concludes our discussion on the items of business. I will close the voting system in 60 seconds. Please ensure you have cast your vote on all resolutions. And I will now pause to allow time to finalize the -- for you to finalize the votes. [Voting]

I declare that voting has closed. Rather than keep you waiting for the result, I proposed to close the meeting at this point. The results of the poll will be notified to the ASX and published on the company's website following the meeting. As that concludes the business for today, I now declare the meeting closed. Thank you for your online attendance today, and I'd like to take the opportunity to wish you all the best for the festive season and 2021. Thank you all.