Gale Pacific Limited (GAP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Gale Pacific 1H '21 Results Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. John Marcantonio, Chief Executive Officer and Managing Director. Please go ahead.

Thank you, Amanda. Good morning, ladies and gentlemen, and welcome to the call. As Amanda said, my name is John Paul Marcantonio, Chief Executive Officer and Managing Director of Gale Pacific Limited. Joining me on the call today is Domenic Romanelli, Chief Financial Officer of Gale Pacific Limited. On behalf of our team and our Board, Dom and I would like to thank each of you for taking the time to join us this morning. We'll walk through the presentation that was lodged with the ASX just after market closed yesterday. Hopefully, you have a copy and can follow along as we present. I will do my best to highlight each slide transition as we work our way through the presentation. Slide 2, agenda. The agenda for this morning's call is as follows: First, we'll give an overview of our company, global operations, our brands and product categories. Next, we'll brief you on our first half results for financial year 2021, followed by a regional overview of those results. We'll end by outlining our strategy and by providing an outlook for the second half and for the full year. At the conclusion of the presentation, we will address any questions or comments that you may have resulting from today's discussion. Slide 3, a global company. Gale Pacific is a market-leading manufacturer and innovator of technical fabrics used for consumer and commercial applications around the world. The company was founded in Melbourne, Australia in 1951. And today, we have operations in Australia, New Zealand, the United States, China and Dubai and employ more than 600 people worldwide. Our products are sold across Australia, New Zealand, Asia, the Americas, Europe, the Middle East, Africa and a growing number of additional markets. Our core strategy is to build Gale Pacific into a faster-growing, world-class global fabrics technology business. That strategy is underway and delivering results. Slide 4, Gale Pacific global brands. Our brands and products are recognized around the world for their innovative technology, quality, durability and reliability. Our consumer products ranges marketed primarily under the Coolaroo brand include outdoor roller shades, shade sails, shade and garden fabrics, shade structures and pet products. They can be found at market-leading retailers, both in-store and online, around the world. Our commercial products ranges marketed primarily under the GALE Pacific Commercial brand include knitted, coated and advanced polymer fabrics used in a growing number of applications across the agricultural, horticultural, aquacultural, architectural, construction, mining and packaging industries. Slide 5, results overview. We'll now provide an overview of the company's results for the first half of financial -- of the financial year, followed by a regional overview where we'll discuss the drivers and enablers of the group result in greater detail. Slide 6, highlights. Profit before tax was $8.8 million for the first half, up 344% from a $3.6 million loss in the first half of FY '20. Global revenue was $106.1 million for the first half, up 70% from $62.3 million in the first half of FY '20. EBITDA was $14.7 million for the first half, up 332% from $3.4 million in the first half of FY '20. EBIT was $9.7 million for the first half, up 488% from a $2.5 million loss in the first half of FY '20. Net profit after tax was $6 million for the first half, up 331% from a $2.6 million loss in the first half of FY '20. The improvement in profit resulted in earnings per share of $0.218 for the first half, up 329% from a $0.095 loss in the first half of FY '20. As a result of the strong first half financial performance, the directors have declared an interim dividend of $0.01 per share and a special dividend of $0.01 per share. Both are unfranked and payable on 9 April 2021 to shareholders on the register at 3 March 2021. Slide 7, revenue by geography. The primary driver of the global revenue and profit increase was strong sales growth across retail and commercial sectors in both the United States and Australia, our largest core anchor markets. Slide 8, cash flow and balance sheet. Net cash from operating activities was $20.5 million for the first half, up 669% from a negative $3.6 million in the first half of FY '20, which marks Gale's first positive first half result since December of 2015. Net debt at 31 December 2020 was $3.9 million, an 84% improvement compared with $23.6 million at 31 December 2019. Slide 9, half year financial performance. Robust market conditions in our core categories across end markets and our strategy and action led to strong first half sales growth, expanded profitability, a material improvement in cash flow and a significant reduction in debt. We're particularly encouraged by our first half result considering the highly complex and challenging global operating environment we faced. Slide 10, regional overview. We'll next provide an overview of each of our operating regions, starting with the Americas. Slide 11. Americas revenue was $37.0 million for the first half, up 111% from $17.5 million in the first half of FY '20. EBITDA was $3.6 million for the first half, up 427% from a $1.1 million loss in the first half of FY '20. Our core product ranges and new products are resonating well with our target consumers, helping us drive material increases in revenue and profit while helping secure incremental points of distribution across retail channels, both in-store and online. Our sell-through rates were up across the market as consumers continue to spend more on home improvement projects and products due to COVID-19 restrictions. We are well positioned to benefit from this positive trend in consumer spending across the retail landscape. It should also be noted that the Americas result for the first half includes a provision for impairment of $2.5 million against personal protective equipment inventory. Slide 12, the Americas growth drivers. We were successful in launching new products, developing our core categories, expanding distribution and investing to generate incremental demand for our brands and products, both in-store and online, partnering with our customers to drive mutual category growth and expansion. Our commercial architectural fabrics ranges grew following the launch of our new flame retardant product range, the addition of new customers and increased market demand for shade projects and products. We've accelerated our efforts to grow our business more rapidly in the united -- in the Americas with strategic investments in people, capabilities, product innovation, distribution expansion, service and supply chain infrastructure. Slide 13, the Americas growth potential. The focused investments in the United States are in line with our strategy to build Gale Pacific into a larger, faster-growing global fabrics technology business. The United States is now our largest market with the largest total growth potential over the coming years. We'll leverage our core competencies, local and global infrastructure, customer partnerships and broad market distribution to accelerate growth and increase household penetration over the coming periods. Slide 14. Turning now to Australia and New Zealand. Revenue was $62.4 million for the first half, up 70% from $36.8 million in the first half of FY '20. EBITDA was $11.6 million for the first half, up 190% from $4 million in the first half of FY '20. Retail growth was driven by new product launches, increased ranging and increased consumer spending on home improvement products and projects during COVID-19 restrictions. Growth in commercial was attributable to high demand across our range of market-leading coated technical fabrics, most notably those used in grain handling applications. Slide 15, ANZ growth drivers. We brought a significant number of new products to market and increased ranging across our core consumer shade categories while investing in activities to drive demand and drive category expansion with our partner customers in retail. We proudly announced and launched an exclusive endorsement partnership with Cancer Council Australia for consumer and commercial shade products, with the goal of contributing to sun safe awareness, research, educational and support programs and services. Growth across our coated fabrics portfolio was supported by our investments in expanded manufacturing capacity, while both retail and commercial benefited from improvements across our global and our local supply chain. We've made investments in people, capabilities, product innovation, distribution expansion and supply chain efficiency initiatives in the half, in line with our strategy to build a more efficient, profitable, growing business in both Australia and New Zealand. Slide 16, a landmark grain season. Overall sales of our technical coated products ranges used across agricultural, aquacultural, construction, mining and packaging markets were up sharply versus both calendar 2019 and calendar 2016, our prior record high year. Australia's historically large grain harvest in calendar 2020 led to a large increase in sales of our market-leading range of technical fabrics used in grain handling applications. Our operational improvement strategy and projects enabled us to effectively service our partner customers as our joint businesses surged. Slide 17. Moving to the Middle East and North Africa, revenue was $4.4 million for the first half, down 24% from $5.8 million in the first half of FY '20. EBITDA was $1.1 million for the first half, down 17% from $1.5 million in the first half of FY '20. Challenging macroeconomic and broad market trading conditions persisted throughout the first half. Pandemic-related restrictions continued to affect demand throughout the region and our continued tightened credit policy impacted trading. Though overall debtors decreased, challenges in collecting long-dated debtors persisted. We continue to work collaboratively with our regional partners through this challenging trading environment and are hopeful of returning to growth in the coming half. In Eurasia, revenue was up -- our revenue was $2.3 million for the first half, flat to the first half of FY '20. EBITDA was $0.5 million for the first half, down 17% from $0.6 million in the first half of FY '20. Though challenged by variability in key market openness and lower economic activity due to COVID-19, the region was relatively flat in the first half. Progress continues against our strategy of driving demand for our commercial fabrics ranges and servicing demand increases for core consumer product ranges in key markets. Slide 18, company strategy. We'll now outline our company growth strategy and end with our outlook for the second half and for the full year of the financial year. Slide 19. Our core strategy is to build Gale Pacific into a faster-growing, world-class global fabrics technology business through product innovation, category growth, improved operations and by expanding into new markets. The progress that we've made against this strategy enabled the set of results that we reported today, and there remains significant scope to further develop our company in line with this framework. Slide 20, product innovation. New products are the lifeblood of our company and a critical component of our growth strategy. New product innovation has fueled our expansion in the United States and Australia with new product vitality rates steadily increasing each year across both markets. Recently launched new products with new benefits in our core outdoor roller shade and shade structures categories are examples of this strategy in action. We've accelerated our investment in product development and are focused on developing and launching functional product innovation with new benefits in our core consumer and commercial categories. Slide 21. Our industry-leading range of flame retardant architectural shade fabrics is a prime example of our product innovation strategy at work. We have the widest range of colors, design and performance options while being developed, launched and continuously tested to meet or exceed the most stringent fire safety standards in the world. Slide 22, category growth in new markets. We've rapidly developed our core categories and are developing new near-neighbor categories in both consumer and commercial. This allows us to grow our categories by attracting new users, increase usage and driving higher value benefits while expanding our distribution, entering new markets and driving demand. Our new Coolaroo foldable pet bed and grow bags ranges and our new GALE Commercial coated fabric innovations are examples of this strategy in action. Slide 23, operational improvements. We've made steady investments in and marked improvements across our global supply chain, and we are accelerating our plans to further increase our effectiveness, flexibility and efficiency. We're better matching our capacity to serve with market demand and developing our operations so that we may continually improve service to our partner customers, consumers and commercial end users as they evolve. Increased production capacity in our China and Australia manufacturing facilities, expanded distribution capabilities and capacity in our United States operations and expanded global sourcing and value engineering initiatives are examples of this strategy in action. Slide 24. This growth strategy is built upon a platform of differentiated company strengths. At Gale, we have a category -- we have category and market-leading brands supported by high-quality, innovative, category-leading products. We have deep institutional technical fabrics expertise with a vertically integrated manufacturing footprint across our knitted and coated fabrics core competencies. Our global supply chain and distribution network enable us to effectively service our customers, consumers and end users around the world. Our portfolio is diversified across consumer and commercial end markets with highly valued, long-standing customer partnerships with many of the world's largest retailers, distributors, fabricators and end users. And finally, our core brands, products and core competencies are well positioned for several current and developing market trends across home improvement, gardening, pet care, outdoor environments, personal, health, safety and protection and asset protection. Slide 25, H2 and full year outlook. We anticipate profit before tax to be in the range of $7 million to $9 million for the second half of FY '21 as compared to $8.3 million for the second half of FY '20 and in the range of $15.8 million to $17.8 million for FY '21 as compared to $4.8 million for FY '20. We anticipate the momentum in consumer spending on home improvement projects and products will continue for some portion of the second half in both the United States and Australia, with comparative growth rates in quarter 4 more moderate as we cycle the initial demand impacts of COVID-19. We have customer commitments in place and are currently executing against our growth plans for the coming selling season in the United States. We have cost efficiency and operational measures in place to counter headwinds we expect to face in the second half, most notably, international shipping and transportation cost inflation and capacity constraints as well as labor and material cost inflation. Our expectations are tempered by these macro factors. Our company and our team have proven resilient and capable of delivering against our growth strategy despite the challenging operating environment. I continue to be confident in our ability to manage these complex operating conditions effectively. I'd like to thank our Gale Pacific team worldwide for their hard work, collaboration, commitment and resilience during this protracted challenging period and for delivering a great result in the face of a highly complex global operating environment. I would like to also thank you all for taking the time to join us today. And with that, I'll now turn the call back over to Amanda, who will lead the question-and-answer session. Thank you.

[Operator Instructions] Your first question comes from Richard Hemming from Under the Radar Report.

Congratulations on the strong results. Are you there?

We're here, Richard, yes. Thank you for the comment. Yes.

No, that's no problem. Just quickly, what was the percentage of wholesale in Australia in terms of sales and earnings?

Richard, when you mentioned wholesale...

We're going to have...

So the grain growth was a large revenue driver and a nice increase in our revenue growth and profit in the region. We do have a -- we don't publish those numbers specifically, but it was a noticeable increase versus the prior year and versus our high watermark year of 2016.

So is it similar -- like is that higher-margin business than the retail business?

The margin profile is mixed across the product portfolio. We have large -- a significant amount of growth in our retail business as well over that front half of the year contributing a nice expansion in our profit for the region as well. So there's a good product mix between both -- in this front half of the year, both of those categories grew in concert pretty significantly, and that's what led us to the first half result.

So would they have grown -- the grain business, well, that have grown in line with the retail business. So you're saying your growth was -- as there was -- the strong growth in the domestic market was a result of both -- equally both those businesses, was it?

I wouldn't necessarily -- I wouldn't say it was an equal split, but I think that they both had significant -- I would say that they both grew significantly in the first half versus the prior corresponding period and versus -- and specifically in the coated fabrics business, larger growth.

So obviously, that grain business isn't repeatable. So what sort of guidance have you got for the future in relation to that business?

We'll guide for the first half of FY '22 later on this calendar year. We're focused right now on delivering our growth plans across both the United States and Australia in the back half of this year and also building a plan to be prepared for the coming financial year in Australia, specifically to our coated fabrics business.

Right. And in relation to online business, you sort of talked about that in the past. Have you got any numbers on -- in relation to percentage of sales there, in particular in America?

Yes. We wouldn't publish specific percentages, but I would tell you that the rate of increase are 20%. What was that, Richard? I'm sorry.

In the past, I thought you indicated that it was sort of 20% of sales in the U.S.

I think that what you're seeing is a transition in how consumers are spending and shopping during the time period that's -- that they're under right now with some of the restrictions, and a lot of the consumer behavior in the U.S. is taking our product online as well. We're well positioned across the major retailers for consumer products and home improvement products with their online entities as well. And we've seen very rapid growth in those spaces with those customers over the first half of this year. We've expanded the number of products online and have seen some really, really nice growth rates in the front half of the year.

Okay. And lastly, just what's your dividend policy like, given your special dividend this half, but what's your general policy [ jump on ]?