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 declare the 2021 Annual General Meeting for Gale Pacific Limited open. Allow me to begin by introducing my fellow directors. John Paul Marcantonio is our Chief Executive Officer and Managing Director; Peter Landos is a Non-Executive Director; Donna McMaster is a Non-Executive Director; and Tom Stianos is a Non-Executive Director. Also in attendance today is Sophie Karzis, the Company Secretary; Arjun Bagawandas, the company's Group Financial Controller; as well as the company's auditors, Deloitte Touche Tohmatsu, represented by Genevra Cavallo, the partner responsible for auditing Gale's accounts for the financial year ended 30 June 2021. I also welcome representatives of our share registry, Computershare Limited. Firstly, some procedural matters. 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. Today's meeting is being held online via the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit those. At this meeting, there will be 4 items of business, including 3 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 at 10:00 a.m. on the 17th of November. In my capacity as Chairman, I will be voting all available and directed proxies in favor of each item of business. Online attendees can submit questions at any time. To ask a question, select the messaging tab at the top of the Lumi platform. At the top of that tab, there is a section for you to type your question. Once you have finished typing, please hit the arrow symbol to send. Please note that while you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that your questions may be moderated or if we receive multiple questions on 1 topic, amalgamated together. For those shareholders who wish to ask a verbal question, an audio questions facility is available during this meeting. To use this service, please pause the broadcast on the Lumi platform and then click on the link under asking audio questions. A new page will open where you will be prompted to enter your name and the topic of your question before being connected. You will listen to the meeting on this page while waiting to ask your question. If you have any issues using this system, please return to the Lumi platform. Finally, due to time constraints, we may not get to answer all of your questions. If this happens, we will answer them in due course via e-mail or posting responses on our website. 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 at this meeting, a new voting tab will appear. Selecting this tab 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 do, however, have the ability to change your vote up until the time I declare voting closed. I now declare voting open on all items of business. The voting tab will soon appear. Please submit your votes at any time. I will give you a warning before I move to close voting. Before we move on to the formal business of today's meeting, I would like to address shareholders regarding the company's results for the 2021 financial year and comment on trading conditions in the 2022 financial year. After this, the Chief Executive Officer and Managing Director, John Paul Marcantonio, will address the meeting. Our presentations and addresses have been lodged with the ASX and are published in the Investors section of the company's website. The 2021 financial year was an extraordinary period as the COVID-19 pandemic disrupted our business and those of our suppliers and customers. During this period, we focused on keeping our people safe with the health and safety of our employees and other stakeholders our top priority. Despite the difficult conditions, our strategy of building Gale into a growing global fabrics technology business provided an impressive return on investment and delivered strong financial results, with earnings per share increasing from $0.013 in the prior year to $0.045. In addition, the business generated net cash from operating activities of $34.6 million, which enabled the company to complete the year with a net cash balance of $1.5 million. Shareholders received $0.04 per share in dividends compared with $0.01 per share in the prior year. This excellent performance gives us confidence that our strategy is right, and we believe that the company has substantial potential for further growth, particularly in the Americas. While our Managing Director, John Paul Marcantonio, will take you through the results in more detail, our strategies delivered substantial increases in revenue in the Americas and in Australia and New Zealand. This was driven by our investment in new products for consumer and commercial markets and gaining broader retail distribution. We also benefited from a record demand for coated fabrics used in grain handling following a record Australian grain harvest. On behalf of the Board, I would like to acknowledge the commitment, resilience and adaptability of everybody at Gale Pacific during the 2021 financial year. Under the leadership of John Paul, the team continued to innovate and develop new ways of working during the extended shutdowns and lockdowns. I would also like to acknowledge my fellow Board members for their support. Following on from the excellent results achieved in the 2021 financial year, it is disappointing to report that the 2022 year will not achieve the same level of profitability. While revenue is expected to maintain the buoyant level of 2021, input costs, particularly related to logistics and shipping, have risen dramatically and well beyond price increases consistent with our marketing objectives. We do believe that many of the additional costs will reverse, but it is very difficult to know when. While management is addressing these factors, we are confident of our strategy and continue to invest for future growth through further investment in new product development and in sales and marketing resources, which, of course, all increases costs. We remain focused on growth opportunities in the Americas and elsewhere as we continue our plan to become a larger and stronger company. The Board remains focused on driving strategies to enhance long-term shareholder value. We are very confident of the further growth potential of the business. I will now hand over to our CEO and Managing Director, John Paul Marcantonio.

Thank you, David. Good morning, ladies and gentlemen, and thank you for joining us on today's call. I appreciate the opportunity to speak with you on behalf of our company and our team. Hopefully, this marks the final virtual AGM for Gale Pacific and everyone can be in the same place at the same time for next year's Annual General Meeting. Thankfully, lifting restrictions and lockdowns across Australia and other parts of the world make this seem more likely and a welcome return to some level of normalcy. Let me first start by thanking our Gale Pacific team around the world for their commitment, collaboration, hard work and partnership throughout a historically complex and challenging year. I'd also like to thank our customers, shareholders, suppliers and all other external stakeholders for their partnership, commitment and patience throughout this year. This morning, I will first review the 2021 financial year, followed by an overview of our company strategy and then finish with our outlook for the balance of the 2022 financial year. The 2021 financial year proved challenging throughout carrying the momentum from the previous year and marked by the impacts of the COVID-19 global pandemic. Varying degrees of restrictions and lockdowns worldwide, particularly in Australia and New Zealand proved complex and challenging nearly -- across nearly all fronts for our business, our customers' businesses and our teams. Surging demand for our consumer and commercial products presented opportunities for our company to grow. And our team did a great job of meeting these challenges presented by the increased demand and serving our customers effectively throughout the year. Global supply chain disruptions moved to the front and center of the conversation for many businesses increasingly over the last year, and ours was certainly no exception. As communicated throughout the year and again last week, cost inflation, capacity constraints and overall volatility in international shipping and transportation played an increasingly challenging role throughout the '21 financial year, and this has continued into the '22 financial year. Our company also experienced cost inflation and materials throughout FY '21, with costs increasing as we progress throughout the year, particularly in quarter 4. These headwinds have also continued into FY '22. Our teams worldwide have worked diligently to achieve price increases to set a portion of these input cost increases, while our operations teams have endeavored a portion of these costs through productivity and efficiency initiatives. Our teams continue to adapt to the changing environment of the year by remaining flexible and competitive while changing ways of working with each other internally and with our suppliers and customers externally. Despite these challenges in a difficult operating environment, our team delivered strong financial results for the company in FY '22, especially in the ANZ and Americas regions, which we'll highlight shortly. We have also continued progress toward an investment in our strategy to build Gale Pacific into a faster-growing global fabrics technology business throughout the year. Next, we'll move into an overview of the company's group financial results. Revenue for the year was $205.2 million, up $48.9 million or 31% on prior year, which is a new record for the company. Three of our four selling regions in which we operate increased sales with revenue growth across our core markets of Australia and in the Americas totaling over $50 million. This strong revenue growth and increased scale resulted in earnings before interest tax, depreciation and amortization of $28.2 million, an increase of 51% on the prior year. Profit before tax was $17.2 million, up 258% on prior year's result of $4.8 million, while net profit after tax was $12.3 million, up 232% on the prior year's result of $3.7 million. This resulted in earnings per share of $0.0448, up from $0.0134 in the prior year, and the company declared $0.04 in total dividends, up from $0.01 in FY '20. Turning next to a brief overview of the regional results for the company, starting with the Americas. Revenue in the Americas was a record $96.2 million, up 31% from $73.3 million in the prior year, with EBITDA up 14% to $13.5 million. Our core consumer ranges, new products and incremental promotional lines delivered significant in-store and online sell-in and sell-through increases for the full year. Comparative growth rates for sell-through across the first 3 quarters of the year increased significantly and then moderated in quarter 4 as we cycled the initial positive demand impacts of COVID-19 restrictions and government stimulus in the prior corresponding period. Our team also delivered strong growth in commercial architectural shade fabrics following the launch of our new flame-retardant product range, the addition of new customers and increased market demand for shade applications. Turning next to Australia and New Zealand. Revenue grew 42% to $92 million in FY '21 across sectors and categories, particularly strong revenue growth of 70% or $25.6 million in the first half was driven by surging demand for commercial coated fabrics used in grain handling applications and strong growth across consumer categories in retail. Consumer spending on home improvement projects and products on the back of COVID-19 restrictions and government stimulus drove significant and sustained increases in sell-through rates throughout the first 3 quarters with quarter 4 sell-through returning to more moderate historic levels. Our team did a great job of successfully securing a significant number of new products and promotional items across 4 consumer categories, a key driver of the result. Our ANZ team also partnered with Cancer Council Australia for an exclusive endorsement partnership for shade products across core retail and commercial product ranges and brands brought to life both in-store and online. Next, in the Middle East and North Africa, challenging economic and broad market trading conditions persisted throughout the year, especially in the first 3 quarters as pandemic-related restrictions continue to affect demand region-wide with some improvement in quarter 4. Though overall debtors decreased and efforts to reduce long-dated debtors showed signs of improvement exiting the year, challenges persisted. Our tightened credit policy continues to impact trading, and we remain committed to supporting our trading partners in the region. Moving on to Eurasia. Growth accelerated in the second half, driven by increased demand for our differentiated commercial fabrics ranges and select consumer products ranges. The Eurasia team delivered growth across most trading countries on the back of increased demand for commercial shade structures and consumer demand increases on the back of COVID-19 restrictions. The company's stated core strategy is to build Gale Pacific into a faster-growing world-class global fabrics technology business. We're working to achieve this by developing and launching innovation in our core product categories, leading core category growth, improving our operations and entering new markets. We have invested in line with this strategy, particularly in new product development to drive category growth and expansion and to fuel our growth plan. I'll next update you on our developments and progress against these elements of our strategy, starting with product innovation. Our team is focused on developing functional product innovation in our core categories that will further differentiate us from our competition and drive more profitable growth for the company over the coming years. Today, I'm pleased to announce the upcoming launch of an exciting new product category in our core coated fabrics business. [ Apex ] is a breakthrough new to world waterproof, architectural membrane that delivers optimal strength and durability and up to 35% less weight than PVC alternatives. The product has 2 key innovations developed in-house by our Gale Pacific research and development team that are currently patent pending, including NEOCLEAN technology. This unique permanent embossed surface texture causes water to beat and simply roll off the fabric, clearing small dirt particles along the way and naturally cleaning the surface, which helps fabric structures stay cleaner for longer. Apex is also 100% recyclable, sustainable and safe for the environment, while conforming to some of the most stringent global flame retardancy standards. Apex will launch in the second half of the 2022 financial year and represents our strategy to leverage our core coding capabilities to develop new functional product innovation and extend our product mix into new near neighbor categories, applications and end markets. Next, LANDMARK is Gale Pacific's market-leading range of heavy-duty coated fabrics used in industrial and agricultural applications, particularly in grain handling. LANDMARK is made from 100% recyclable materials today. Our company has developed a patented process for recovering end-of-life grain covers from the market and reusing them to produce new generation LANDMARK grain covers, a closed-loop recycling solution. This approach diverts waste grain covers from the landfill and reduces the overall demand for virgin material and the production of new covers. In partnership with Deakin University, our company has recently been awarded a grant from Sustainability Victoria to fund research into maximizing the amount of recycled content that can be added to our LANDMARK coated fabrics without compromising its critical performance characteristics. This exciting research and development project will help reduce waste through innovation, aid and progress along the path to a more circular economy and support a more sustainable future for our industry and our customer partners. Growing the size and scale of our core categories is a critical component of our strategy to develop our business and the businesses of our partner and customers. Our Americas team working collaboratively with our global cross-functional teams is developing and expanding our regional product mix to drive category growth with our customers. We're leveraging our core knitted shade fabric competencies and pairing them with our category, consumer and customer insights from our Australia team and business to build a larger footprint for our share cloth and shade sales category in the United States, where we will launch a new national program with a major partner retailer in the second half of the 2022 financial year. The Coolaroo outdoor shade center is the first of its kind in the Americas and will help develop the shade category for both Gale Pacific and our partner retailers over the coming years. We have also successfully secured new and promotional product offerings for our core outdoor roller shades category for the coming summer selling season across both the United States and Canada. In Canada, specifically, we've successfully extended our distribution footprint, adding new stores, promotions and products and are on forecast to more than double turnover in FY '22 as compared to FY '20. Our team is also launching the new Coolaroo grow Bags range in the second half of the year, extending our core base fabrics into new growing applications like home gardening. We're also building out our core Coolaroo elevated pet bed range with 2 new designs with new benefits coming to the market this year. The Coolaroo on the go elevated foldable pet bed and the Coolaroo elevated pet bed pro. In Australia and New Zealand, our team has also been working diligently to build out our product mix in our core categories like shade structures and outdoor roller shades, with exciting new products and promotional lines launching in store now with many more to come in the next few months and into the back half of the year. As an example, our ANZ team will soon launch an exciting new significantly expanded market-leading product assortment into the outdoor roller shades category into the Australian market in the back half of this financial year. The team are also broadening and deepening our corporate and promotional umbrellas range for the coming summer selling season with a leading assortment of new products hitting the stores now and over the coming months. It's an exciting new product mix with on-trend fabric colors and patterns combined with new product designs, many of which are endorsed by Cancer Council Australia. And to support the launch of these new products and to drive awareness of the Coolaroo brand with our target consumers, our ANZ team have launched an exciting, new advertising and brand development campaign for the summer entitled Coolaroo shade solutions, Cancer Council endorsed, summer approved. The integrated campaign leverages our exclusive endorsement partnership with Cancer Council Australia for shade solutions and will run across print, social media and streaming video services through to Australia Day, including during the Ashes Cricket Series commencing in December. We've also taken steps to improve our operations throughout the year despite the challenges faced. In Australia, our team successfully executed the transition of our former Queensland warehouse to a third-party logistics provider and transition domestic pallet freight to a new supplier with these projects designed to deliver efficiency, capacity and quality improvement benefits. Our ANZ team also delivered record levels of manufacture coated product while developing and delivering productivity, capacity utilization, quality and operator development initiatives. In the Americas, our operations team delivered additional improvements, including direct-to-consumer shipping capacity enhancements as well as customer service improvements and customer roller shade manufacturing capacity and efficiency enhancements. At our China manufacturing facility, GPST, our team delivered production capacity expansion and improved lead times and quality while lowering waste rates throughout the year. Moving now to our outlook for the balance of the 2022 financial year. As announced on 9 November 2021, the company now anticipates profit before tax for the first half of FY '22 to be in the range of negative $1.5 million to positive $0.5 million. The guidance reflects higher than forecast overall input cost inflation particularly in logistics and distribution, some of which are expected to be transitory and have been partially offset by price increases, as noted earlier. While it has previously announced that the company's first half profit would be below the prior corresponding period, significant cost inflation, capacity constraints and volatility in international shipping and transportation have -- or having a more significant impact than anticipated. It is difficult to predict when this market volatility will temper. However, the company expects these conditions to continue into calendar 2022. Though first half FY '22 revenue is anticipated to be more moderate as compared to the first half of FY '21, the company does expect revenue to be materially above that, which achieved in the first half of FY '20. The company remains committed to its stated strategy of investing in future growth strategies, particularly in the United States. In the Australia and New Zealand region, our team is currently launching a number of new products across our core shade categories into the retail channel. Pleasingly, strength across the Australian agricultural sector has continued with high demand for the company's coated fabrics using grain handling applications. In the Americas, as stated earlier, our team is endeavoring to expand and consolidate its business foundations for the coming Northern Hemisphere summer selling season with new products, promotions and expanded assortments in our core consumer categories underway. In line with our strategy to build a more significant business in the region over the coming years, the company is also investing in additional marketing and selling capacity capabilities. The company is also forecast for revenue growth in the second half of FY '22, with an improvement on the first half result anticipated. As our Chairman previously stated, the Board remains focused on driving strategies to enhance long-term shareholder value. In closing, I want to thank our team for their hard work and dedication and their commitment to building our company and our business throughout this challenging period. I also want to thank you, our shareholders, for your continued support and our Board for their counsel, input, alignment and commitment to our operating plans and company strategy over many years. And I'll now hand the meeting back to you, David. Thank you.

Thank you, John Paul. And as you can see, there are some very exciting products innovations being worked on within the company. 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 2021. The Corporations Act requires that the audited financial statements and related reports for the 2021 financial year be considered at the meeting. These reports were made available to shareholders on the 24th of August 2021. Although shareholders are not required to formally vote on these reports, I welcome any discussion or questions on the reports. I'll 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 the CEO's presentation. Sophie, do you have any questions?

No questions, David.

Thank you. I ask the Company Secretary to record that the audited FY '21 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 2021 annual report. The vote on this resolution is advisory only and does not bind 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, and I will take these as being read. Sophie, do you have any questions in relation to Resolution 1?

No questions received, David.

Thank you, Sophie. 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 will now move to Resolution 2. The next item of business, Resolution 2, relates to my reelection as Director. I was appointed as a Director of the company in November 2009 and retire as a Director in accordance with clause 7.1 (f) of the constitution of the company and being eligible under clause 7.1 (h), I'm standing 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. Sophie, do you have any questions?

No questions, David.

Thank you. I will now formally put this resolution to the meeting. I will now move to Resolution 3. The next item of business, Resolution 3, relates to the reelection of Donna McMaster as a Director. Donna was appointed as a Director in March 2019 and retires in accordance with the constitution of the company and being eligible is standing 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 would just add that from a personal perspective, I've found Donna to be an excellent Director. 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.

Thank you. I 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. Are there any other questions that any shareholder would like to ask? Sophie, are there any other questions?

No questions received, David.

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

I declare that voting has closed. Rather than keep you waiting for the result, I propose 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 declare the meeting closed. And thank you for your online attendance.