Gale Pacific Limited (GAP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Gale Pacific Limited Full Year 2021 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. John Paul Marcantonio, Chief Executive Officer and Managing Director. Please go ahead.

Thank you, Claudia. Good morning, everyone, and thank you for joining us this morning, this afternoon or this evening, no matter where you are in the world. I'm just outside of Orlando, Florida, so it's evening here. But I understand most of you are most likely in Australia, so good morning. I'd like to welcome you to our call. With me today have Domenic Romanelli, Chief Financial Officer of Gale Pacific, who will be joining me to discuss the results for financial year '21 for Gale Pacific. Those of you who have had the opportunity to download and/or access our release materials are welcome to follow along. I'll be doing a page turn through our presentation this morning and then making sure that we have enough time at the end to address and answer any of your questions about our performance of this year or outlook into the coming year as well. So to do so, I'll talk about the company at a glance. I'll talk about our global footprint and our brands. Then move into an overview of our financial year '21 results, hitting our key highlights and then discussing our financial performance in detail, cash flow and financial position, which I'll ask Domenic Romanelli to do for us. Then we'll move into an overview of our regional performance, hitting the Americas, Australia and New Zealand, the Middle East and North Africa and Eurasia. We'll then discuss the company's strategy for the coming years as well as our outlook for the coming period. Gale Pacific is a global company. We're a fast-growing, world-class global fabrics technology business. And we've been building toward that end for many years now. We're a market-leading manufacturer and vertically integrated innovator of technical fabrics used for consumer and commercial applications around the world. And our products can be found and used across various industries, in various applications and end markets, including architecture, agriculture, mining, construction, home improvement, to name a few. We have a global team, global operating footprint across Australia and New Zealand, United States, Middle East and into Asia and to China as well. And our teams around the world are working not only to manufacture, distribute, source and work with customers to bring to life our brands and products, we also have a truly global intent for the coming years to build our business further. The company is organized around 2 end markets, consumer products and commercial products. Our consumer product go to market primarily under the Coolaroo brand, which is a globally recognized brand for consumer shade and pet products. We are market leaders in categories like roller shades, shade sails, shade and garden fabrics, shade structures and pet products, and they can be found at major brick-and-mortar and online retailers around the world. Our commercial business is organized under the GALE Pacific Commercial fabrics brand, recognized around the world in the markets in which it participates, has a leading commercial knitted and coated polyfabrics. It stands for innovation, quality, durability and reliability in the industries and the markets in which it serves. GALE Pacific knitted and coated fabrics can also be found in a growing number of applications around the world. I'll next speak to the results for financial year '21. Firstly, profit before tax came in at $17.2 million for the year, up from $4.8 million in the prior year, an increase of 258%. On the back of a revenue increase to $205.2 million, up from $156.3 million, an increase of 31%, allowed us to deliver EBITDA of $28.2 million, up from $18.7 million in the prior year, an increase of 50.8%. EBIT, up to $19 million in the year, up from $7 million in the prior year. And NPAT, or net profit after tax, of $12.3 million, up from $3.7 million in the prior year. The accelerated profit delivery allowed us to deliver earnings per share of $0.0448 in the year as compared to $0.0134 per share in the prior year. At the half year, we announced an interim dividend of $0.01 and a special interim dividend of $0.01. And today, we announced a final dividend of $0.01, which is unchanged from last year at $0.01 and a final special dividend of $0.01, up from 0 in the prior year. That delivers a total of $0.04 in dividends in total for the company, which is up from $0.01 in the prior year. The record revenue growth that we delivered in the year was across 2 primary markets, and those are our 2 anchor or core markets of Australia and the United States. Revenue in those 2 markets topped $50 million in the financial year. I'll speak more specifically to what drove those results as we speak to the regional performance in a bit. But first, I'll ask Dom Romanelli to now take us through our financial performance in detail for the full year. Dom?

Thanks, John Paul. And it's a pleasure to be able to tell shareholders that we've been able to -- Gale's been able to deliver a record revenue with accelerated profit whilst materially improving our operating cash flow which resulted in the company, at the end of the year, having a net cash position, which is a great result considering where we were over the last couple of years and the current market situation that exists, including pandemic. As John Paul highlighted, our revenue topped $205 million, first time it's topped $200 million, a record result resulting from the Americas and the ANZ business. And that, in turn, produced healthy increases in our EBITDA, EBIT and our profit before tax of $17.2 million compared to $4.8 million for the prior financial year. Basic earnings per share of $0.0448, an increase of 234%. Another pleasing result and allowed us -- allowed the directors to declare the interim dividend they did of $0.01 ordinary and $0.01 special dividend, and we've been able to replicate that in the final dividend -- for both final dividends, ordinary dividend and special dividend. And they totaled $0.04 for the year, unfranked. Our net cash, as I said, from operating activities, $34.6 million; and net debt, $1.5 million cash position. And it's pleasing to say we were able to pay both the interim ordinary and special dividends and still end up in a net cash position at the end of the year because they total over $5 million. If we turn to Slide 9, it's just more reflective of our wonderful cash position both as a result for the year and also in our final position. And it places the company in a strong financial position to go forth with its growth plans going forward. And on that note, I'll pass back to John Paul.

Thank you, Dom. I appreciate you taking us through the details on the strong financial performance from the financial year '21. Before I move into the regional overview of our businesses, I'd like to first talk about 2 factors that I think are important to note, specifically across Australia, New Zealand and the United States. And that is the growth, the effort that we delivered as a company on the back of many years of hard work to put the infrastructure and the teams in place to deliver such a result and also speak to the specific external factors that have contributed to that result, most notably a quite positive shift in consumer spending on home improvement projects and categories throughout periods of lockdown and government stimulus throughout the year. I think that, particularly in Australia and the United States, put a role in delivering some of the record performance that we see here today. And as we speak specifically to our outlook statement at the end of this time, we'll mention what we see coming toward us over the coming year with respect to these factors. Let's move now into the Americas. Revenue of $96.2 million, which is a record for the company in the region, was up 31% year-on-year versus $73.3 million in the prior year. As noted at the half year, first half revenue was up 111% to $37 million, while second half revenue increased 6.1% to $59 million. It's important to note that both of those half yearly figures were records for the company in the Americas region. EBITDA for the year FY '21 was $13.5 million as compared to $11.8 million in FY '20. For those of you that have had a chance to review our results and the press release would note that there's a -- included in the $13.5 million, there's a provision of $6.6 million for the impairment of personal protective equipment inventory in the Americas region. We should also note that comparative growth rates for the existing parts of our consumer business, which saw exciting levels of sell-through across the first 3 quarters of the year, did moderate in Q4 as we cycled the initial positive impacts of COVID restrictions, lockdowns and then the government stimulus activity that I mentioned earlier. The pleasing part was that the record revenue was driven across the core ranges with new products, incremental placements and incremental promotional lines, both in-store and online. And those new products and existing product growth signaled strong resonance with our target consumers here in the Americas over this past year. In order to service that demand, we added operational capacity in the region across customer service, our custom roller shade manufacturing facility as well as distribution, including the direct-to-consumer shipments, which allowed us to better and more efficiently service the increased levels of demand throughout this year. We did experience supply chain complexity, including international shipping capacity constraints, which affected our business more broadly and overall input cost inflation. And it's important to note that import tariffs for goods manufactured in China persisted throughout the balance of this year. Throughout the course of the year, though, we continue to make strategic investments to not only support and deliver but to accelerate growth in the region by adding additional people and capabilities, focusing on developing and launching new products expanding distribution online and in-store. And as I mentioned, investing in service and supply chain capability. It should be noted that we have strong customer partnerships in the region with some of the largest retailers in the world that we worked collaboratively with to deliver this growth across both our consumer and our commercial fabrics range categories, which also saw significant levels of growth in the year in the Americas region. As we mentioned previously, this market in America is now our largest market, but it's also one of the largest growth potential markets for the company over the coming years. The sheer size of the population, the number of households and the developing nature of our core ranges as well as the ability for the company to develop and launch new products into this market, we believe, is material and significant over the coming periods. And we'll continue to invest in line with that growth opportunity over the coming years, which we'll detail a bit further as we move into the outlook statement. Moving on to Australia and New Zealand. Revenue delivery of $92 million in the financial year versus $64.6 million in the prior year. As we mentioned in the first half, revenue was $62.4 million, up 70%, driven by increased demand for coated fabrics used for grain handling and strong growth across consumer categories as well. Growth moderated a bit in the second half of the year but still up, though, 6.5% on prior year to $29.6 million. Similar to the United States, home improvement projects and product spending on the back of restrictions help us drive significant and sustained increases in sell-through across the market, with quarter 4 sell-through and consumer behavior moderating and returning to more historic levels. The team in Australia and New Zealand did a wonderful job of developing, launching and bringing to life a significant number of new products and promotional items as they were launched in the year, and that was also another key driver of the result for the company for the full year. EBITDA for the year at $14.4 million, significantly up on the prior year at $5.4 million. As I mentioned, key growth drivers were new product launches, customer partnerships, demand generation across our existing and new lines that bring more awareness and conversion to those categories with and through our partner customers. As mentioned previously, we expanded our manufacturing capacity in our Braeside coating operations. And I think that the team did a wonderful job of leveraging that expanded capacity to become more efficient as well as increase output throughout the year. We made several supply chain improvements, which we've noted in the results release, across manufacturing, procurement as well as our distribution footprint. We've launched efficiency initiatives as well across our store servicing model. And there's more to come with the future relative to investing and improving our distribution and transportation footprint in the region to improve further our quality service and delivery over the coming years. And the team in Australia has done a wonderful job of leveraging new capabilities, bringing in additional people to the group while still building and furthering product innovation in our core categories, expanding ranges by increasing additional distribution and, as I mentioned, becoming more efficient across our supply chain. I noted our landmark grain season earlier and how it drove a significant amount of revenue through the financial year. And at the half year, we mentioned our exclusive endorsement deal with Cancer Council Australia, which the team in Australia has done a wonderful job of developing and bringing to life not only this past year but over the coming years, as we'll partner to bring both in-store and on-product branding, targeted digital advertising and bring key commercial partners and influencers online to further develop and launch not only products but bring awareness to help drive adoption of these products and sell-through through the market with our partner customers. Moving to MENA. Challenging trading conditions persisted throughout the year, specifically throughout the first 3 quarters of the year, and we did return to growth in the fourth quarter of the year versus prior period. Full year revenue was down 18% from $10.5 million to $8.6 million, though EBITDA was flat in the year. Overall debtors decreased throughout the year and long-dated debtors showed signs of improvement exiting the year, though challenges did persist as we move throughout the year. We maintained a tightened credit policy to work through the debtor book and it continues to impact trading, though we remain committed to our partners in that region. In Eurasia, we saw a 5% growth to $8.4 million in financial year '21 on the back of an $8 million delivery in the financial year '20. Growth accelerated in the second half of the year due to increased demand for our commercial fabrics ranges and consumer products ranges. And we delivered growth across most trading countries due to increased demand for commercial shade structures and increased consumer demand on the back of restrictions in some markets. EBITDA was flat for the year versus prior year to $2.7 million. Now moving into the company strategy. And we've been consistent in our goal to drive and build Gale Pacific into a faster-growing, world-class, global fabrics technology business through innovating in our core product categories, by driving growth across our categories, by improving our operations and by entering new markets. Our product innovation pipeline continues to grow. We've seen a strong delivery of new products through the market this financial year and anticipate that will continue in the coming years. We've seen that we've been able to accelerate not only our product development but also our product delivery through our core brands in retail and increasingly so, over the coming years, in our commercial fabrics ranges. An example of that is our flame retardant fabrics innovation, which lunch into the market at the end of the last financial year. And our teams around the world have been working to place, drive sell-through and adoption of those ranges around the world in this financial year. We'll look to develop new categories and enter new markets, and we're expanding our core categories as well as developing new near neighbor categories in both our consumer and commercial ranges that allows us to grow our categories with our customers, attracting new users, bringing more usage and driving more benefits into our categories with and through those partners while trying to expand distribution and entering new markets to drive demand. We've launched in this year our new Coolaroo foldable pet bed ranges, and our grow bags ranges are now coming to market in the Americas specifically. And these are examples of the strategy in action. Further work is being done across our commercial coated ranges, and there'll be exciting new developments which we'll share with you in the coming year about some breakthrough new product innovation in that category as well. We've worked to improve our operations across the globe. We've made steady investments in and market improvements across our global supply chain despite the challenges we're seeing, accelerated plans to further increase effectiveness, flexibility and efficiency in that function. We're better matching our capacity to serve with the market demand as evidenced this year by the surges in demand we've seen both in Australia for our coated ranges as well as in Australia and the United States for our knitted ranges, both in consumer and commercial. And we'll continue to develop our service capabilities as we partner with customers, consumers and commercial end users as they evolve. I mentioned several initiatives that we've launched throughout the last 1 to 2 years, and I think we'll continue to see improved operations and better flexibility while continuing to maintain and improve cost to serve over that time frame. Gale Pacific is known for several key strengths. I think the foundation of our business is built on the back of category and market-leading brands and products with high-quality innovative products that are distributed through customers that have long-standing partnerships with. We're diversified across consumer and commercial end markets. We have technical fabrics expertise that many of our competitors do not have, and we are vertically integrated across our manufacturing footprint which has enabled us during a very difficult time to better manage our own destiny with relation to the manufacturer and distribution, development and service of our core product categories. We do have a global distribution footprint and a global supply chain. And our products, we believe, both in consumer and commercial, are very on trend for the outdoor environment and the developments over the coming years that we believe are going to propel the categories and our brands forward. Moving finally on to our outlook for the coming year. The acceleration in results delivery that we've seen in the prior year and the progress against our strategy places us in a strong financial position entering FY '22. We anticipate that the positive demand forces across both consumer and commercial end markets will moderate to some degree this year. And we also anticipate that the complex, unpredictable environment for global supply chains and the inflationary environment for shipping, materials and labor will continue to some degree in FY '22. Despite these challenges, we'll continue to invest in line with our strategy to build the company for the future. As we mentioned earlier, given the size and the scale and the long-term growth potential for our business in the Americas region, and in the U.S. specifically, we're adding management capability, leadership roles, sales and marketing resources in this region. In Australia, we continue to invest in profitable growth initiatives and operational improvement initiatives. And our results delivered in the prior year gives us great confidence in the plan moving forward. And while it's difficult to forecast in the current environment, we believe the first half profit in FY '22 will be below prior year due to several factors. First, we believe that we'll see lower forecast volumes across consumer categories in Australia, New Zealand and the Americas primarily due to more moderate consumer spending and retail sell-through. Secondly, will have a lower forecast for the Australian grain season than prior year, which will impact our coated fabrics volumes as compared to prior year. We'll see continued input cost inflation across shipping, transportation, materials and labor. And we'll work to offset those cost increases by enacting progressive price increases throughout the year while working with our customers that are also consistent with our marketing objectives and our product positioning. We believe that we'll continue to see volatility and delays in international shipping due to capacity constraints and some impacts of the coronavirus on the global transportation network. We also have made significant investments in our management capability and our selling and marketing resources in the United States to drive growth over the coming years. And we are currently planning for growth in the second half of this year. We do anticipate to be able to provide improved visibility on the company's earnings and outlook at our AGM in November for the coming years. And in closing, I'd like to say a big thank you to all of you on the line for joining us today. I'd also like to thank our team for their continued effort, their hard work, their care, their resilience during a very, very difficult time. For us to deliver a record result across a very challenging and complex year while doing it in primarily new ways for our company says a lot about our team's ability to deliver during very difficult environments. And I think the resilience stands out here. So I'd like to say, first and foremost, thank you to them. I'd like to thank our Board for their confidence and their patience in our team and also their support as they've helped us navigate the last 1.5 years. I'd also like to thank you, our shareholders, for your continued support of our business and our team and of our vision to develop the company moving forward. Without our customers and end users, we wouldn't have a business. And I think that our team's ability to service them during a very challenging year speaks volumes about our partnerships as well as the quality of not only the products we manufacture and sell but the way in which we work with and through the market to deliver them to our common customers. And we thank our suppliers, our partners and all of the stakeholders as well for bearing with us, partnering with us, helping us and helping the company deliver a fantastic result in a very challenging operating environment, in a very difficult year. With that, I'd like to close, and I turn the call back over to the operator for any questions by anybody on the call today. Thank you.

[Operator Instructions] The first question comes from [ Richard Wilkins ] who is a private investor.

My question is just in regards to the franking credit balance of Gale Pacific. I note that in your annual report at Note 7, it appears as though you had a franking credit deficit in the prior year, which looks like it's been zeroed out this year. So I'm just wondering what's the franking credit balance of Gale Pacific. And if there is franking credits, will consideration be given to at least partially franking dividends going forward?

Thank you, [ Richard ]. Dom, would you like to answer [ Richard's ] question regarding franking growth?

Yes, sure. Thanks for the question, [ Richard ]. Yes, we have got ourselves, with the earnings that have been generated in the Australian business, back into a position where the opportunity to consider a partial franking percentage on our dividend is improved where, initially, we thought it might take a couple more years. But we're looking at it now that we estimate towards the last quarter of this financial year '22 that we're in, we'll start to get in that position. And if we have to always tell the Board, if I have to sort of dart at a dartboard of what it'd be, I'd guess around in the low teens or that sort of stuff percentage for the FY '22. And then if the profits continue, as they currently are, then that position will improve as we get into FY '23 and beyond.