Gale Pacific Limited (GAP) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the first half FY '22 results. With us today are John Paul Marcantonio, the CEO of Gale Pacific; and Sheryl Smith, the CFO. [Operator Instructions] So without further ado, let me pass over to John Paul. John Paul?

Thank you, Adrian. Good morning, ladies and gentlemen. Welcome to the Gale Pacific Limited First Half FY '22 Results Release Webcast. As Adrian said, my name is John Paul Marcantonio, Chief Executive Officer and Managing Director of Gale Pacific Limited. Joining me on the call today is Sheryl Smith, Chief Financial Officer of Gale Pacific Limited. And I'd like to take this opportunity to warmly welcome Sheryl to her first Gale Pacific earnings release investor webcast. On behalf of our team and our Board, Sheryl and I would like to thank each of you for taking the time to join us today. Hopefully, you are all keeping safe, well and healthy this morning, afternoon or evening, wherever in the world you may be. Our guide for the call this morning will be the presentation that was lodged with the ASX prior to market open today, which will appear on the screen as Sheryl and I present. The agenda for this morning's call is as follows: First, we'll give an overview of our company, our global operations, our brands and product categories. Next, we'll brief you on the company's first half group results, followed by a first half selling region results. We'll end by outlining our strategy and by providing an outlook for the second half of the 2022 financial year. At the conclusion of the presentation and prepared materials, we'll have time for a guided question-and-answer session, as Adrian mentioned. For those of you that wish to pose questions directly this morning, we're also happy to field any additional queries over e-mail or by scheduling subsequent video or conference call appointment. 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 1951 in Melbourne, Australia. And today, we have operations across Australia, New Zealand, the United States, China and Dubai and employ more than 600 people worldwide. Our products are sold across Australia, New Zealand, the 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. And our growth strategy is defined and is delivering results despite a challenging global operating environment. Our brands and products are recognized around the world for their innovative technology, quality, durability and reliability. Our consumer products range is marketed primarily under the Coolaroo brand include outdoor roller shapes, shade sails, shaving garden fabrics, shade structures and pet products. They could be found in market-leading retailers, both in-store and online around the world. Our commercial products ranges marketed under the Gale Pacific commercial brand include knitted, coated and advanced polymer fabrics, using a growing number of applications around the -- across the agricultural, horticultural, aquaculture, architectural, construction, mining and packaging industries. We'll now provide an overview of the company's group results for the first half of the financial year, followed by a regional overview, where we'll discuss the drivers and the enablers of the group result in greater detail. Global revenue was $95.9 million for the first half, down 10% from the company's record $106.1 million revenue result in the first half of FY '21 and up 54% over -- and over $33 million from $62.3 million in the first half of FY '20. EBITDA was at $6.3 million for the first half, down from $14.7 million in the first half of FY '21 and up 84% as compared to the first half result of FY '20. Profit before tax was $0.7 million for the first half, above the top end of the previous guidance range of negative $1.5 million to $0.5 million positive, which is down $8.8 million from the first half of FY '21 and up 118% on the first half of FY '20. Net profit after tax was negative $0.2 million for the first half, down from $6 million in the first half of FY '21 and up from negative $2.6 million in the first half of FY '20. First half FY '22 earnings per share was a negative $0.08 per share, down from a positive $0.218 in the first half of FY '21 and up from a negative $0.095 per share in the first half of FY '20. The directors have declared an interim dividend of $0.01 per share, which is 50% franked, which is payable on the 15th of April 2022 for shareholders on the register at 02 March 2022. We're pleased with how our team managed a highly challenging global operating environment, including unprecedented cost escalation, capacity constraints, delays, increased lead times and overall volatility in international shipping and distribution, all of which significantly influenced the first half result. Due to these challenges, we've made strategic inventory investments across our supply chain, focusing on delivering consistent and reliable customer service despite the increased complexity and cost. Raw materials, labor and shipping continue to increase in the first half of FY '22 as compared to the first half of FY '21. Our pricing measures have offset a portion of these increased costs to date with additional pricing measures in place heading into the second half of the financial year. Our team skillfully managed the complexity presented by the COVID-19 pandemic across our operations worldwide. Though we experienced mandatory plant closures at our Ningbo, China manufacturing facility for the first 2 weeks of January due to pandemic-related lockdowns. And for 6 days in October due to power restrictions, we have maintained consistent supply and service to our customers. Though the first half of FY '22 revenue was down marginally to the prior corresponding period, we have grown revenue by 54% as compared to the first half of FY '20, demonstrating that our growth strategy is working. And despite these cost headwinds, we remain committed to and have accelerated our investment in our strategy to build Gale Pacific into a faster-growing, world-class global fabrics technology business. And in line with our strategy, we've added new products, increased distribution and added new people and capabilities throughout the first half of FY '22. I'll now turn the call over to Sheryl Smith to take you through a more detailed review of the company's first half financial results. Sheryl?

Great. Thank you, John Paul. For the first half of the fiscal year, our net cash from operating activities was negative $6.3 million. This was down from $20.5 million in the first half of FY '21 and down from negative $3.6 million in the first half of FY '20. The negative net cash from operating activities was driven primarily by higher inventory levels as we built up inventory, particularly in the Americas to prevent against supply chain delays. Net debt in the first half of $12.8 million was up from FY '21, but down 46% compared to FY '20. Again, this increase in net debt was driven by the higher inventory levels. The company remains conservatively leveraged with a strong balance sheet and capacity to support future growth. Moving on to the next slide, the half of your financial performance. I'll walk through the table, but as you can see, performance in the first half of FY '22 was down compared to the prior corresponding period as we saw demand normalizing from COVID-driven home improvement highs. You'll also note that performance is up significantly compared to the same period in FY '20, demonstrating that our growth strategy is working. Revenue for the first half was $95.9 million, down 10% versus FY '21 and up 54% from FY '20. EBITDA of $6.3 million was off 57% compared to FY '21, but up 84% in FY '20. And PBT of $0.7 million was down 93% compared to last year, but up 118% compared to FY '20. Our earnings per share was negative $0.08, down from last year, but up 92% compared to fiscal year '20. Lastly, as John Paul noted, we have declared an interim dividend of $0.01, which will be 50% franked. And with that, I will hand it back to John Paul.

Thank you, Sheryl. I appreciate you taking the time to take the call through the results. I'll next provide an overview of each of our operating segments, starting with the Americas. First half revenue of $32.9 million was down 11% compared to the first half of FY '21 and up 88% as compared to the first half of FY '20, a direct result of our stated growth strategy in action in the Americas region. Cost inflation in shipping, distribution, materials and labor had a negative effect on EBITDA compared to the prior corresponding period, with pricing programs offsetting a portion of the cost increases in the first half. The Americas team has secured incremental pricing programs for the second half of the financial year and expect to offset a more significant amount of current and projected cost inflation in the second half as a result. Our core product ranges continue to resonate strongly with consumers and customers with consumer demand normalizing following pandemic-related home improvement surges in the prior corresponding period. Our Americas team secured a national core shade fabric and shade sails category expansion program in a major home improvement retailer in the first half and has secured incremental distribution across retailers in the U.S. and Canada in the second half in preparation for the coming Northern Hemisphere summer selling season. And despite these challenges, we've added marketing and selling capabilities and resources to drive further product innovation, category expansion, distribution expansion, brand activation and to accelerate e-commerce growth in the second half and beyond. We also increased on hand and in transit inventory in the region due to the aforementioned global supply chain challenges and to ensure that we deliver consistent customer service and product delivery in the region for this coming summer selling season. Turning next to Australia and New Zealand. First half revenue of $57 million was down 9% compared to the first half of FY '21 and up 55% as compared to the first half of FY '20. The primary drivers of the revenue decline in retail were more moderate consumer buying behavior compared to pandemic-related highs experienced in the first half of FY '21 and the impact of cooler, wetter weather across Eastern Australia due to the La Nina weather conditions, especially in November. Despite these challenges, our ANZ team was successful in securing incremental new ranging and promotional placements across our home improvement retail partners. They also successfully commenced trading with several pure-play e-commerce customers, a first for Gale Pacific in the ANZ region. The second consecutive year of record Australian grain harvest resulted in solid demand levels for our company's coated fabrics used in grain handling applications. However, persistent supply chain challenges and pandemic-related supplier challenges constrained regional production capacity for grain covers in the first half. Demand for coated fabrics used in water containment, applications and coated products used in food storage and transportation applications increased in the first half, conditions which are anticipated to continue for the balance of the financial year and beyond. Volatility and cost inflation in international shipping and logistics, coupled with raw material cost increases had a negative impact on EBITDA in the first half compared to the first half of FY '21. Notwithstanding these challenges, our ANZ team delivered a 75% increase in EBITDA compared to the first half of FY '20, driven by our strategy to focus on cost efficiency measures and profitable growth initiatives. Turning next to an overview of the first half results for the Middle East North Africa region. Broad market trading challenges attributable to delays in investment for infrastructure projects and pandemic-related restrictions and market openness across the region persisted throughout the first half with demand for our company's commercial fabrics ranges effective negatively as a result. Our continued tightened credit policy has improved overall and long-dated debtors in the region. This, however, has constrained trading across select customers and markets in the region. And finally, turning to Eurasia. Revenue growth and profit expansion in the first half compared to the first half of FY '21 were attributable to increased demand for our company's differentiated commercial architectural shade fabrics across Europe and Asia and higher demand for branded consumer products in Japan. Growth was achieved despite pandemic-related market restrictions, international shipping constraints and cost inflation. We'll next outline our company's growth strategy and end with commentary and an outlook for the second half of the 2022 financial year. 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 despite the challenging macro market factors that we have faced. There remains significant scope to further develop our company in line with this framework and our teams across regions and functions remain hard at work aligned to this simple, clear strategy and growth plan. We continue to enhance our capabilities and invest further in line with this global growth strategy, doing so through the challenging operating environment of the first half of the -- of the 2022 financial year. These investments serve as evidence of our belief in the strategy, plan and the opportunity in front of us. And that core global growth strategy is built upon a platform of differentiated company strengths. Our company has developed and owns category and market-leading brands, supported by high-quality innovative category-leading products. Our organization has deep institutional technical fabrics expertise and a vertically integrated manufacturing footprint across our knitted and coated fabrics core competencies. Our global supply chain and distribution network enables us to effectively service our customers, consumers and end users worldwide, which has been especially critical in today's challenging global operating environment. 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 and products and core competencies are well positioned for several current and developing market trends across home improvement, gardening, pet care, outdoor environments, personal health and safety and asset protection. And finally, our outlook for the second half of the 2022 financial year. The company anticipates second half FY '22 profit before tax to be comparable to that which -- which was achieved in the second half of FY '21 at $8.5 million, driven primarily by accelerated business performance and additional pricing programs in the Americas region throughout the coming summer selling season. The company also expects that volatility and cost inflation across international and domestic supply chains and inflation in raw materials and labor will persist for the balance of the financial year. Despite this, the company will continue investing according to its strategy of building Gale Pacific into a faster-growing world-class global fabrics technology business, particularly in the Americas region, given its scale and long-term market potential and then further product innovation, market expansion and operations improvement initiatives. The Board remains focused on building long-term shareholder value and believe that the current share price does not reflect the company's under full underlying value. As such, the company has retained Luminis partners to work with the Board and the management team to evaluate options to unlock shareholder value further. I'd like to close by thanking our Gale Pacific team worldwide for their dedicated, excellent work and their commitment throughout the first half. We delivered a solid set of results for the company in the face of significant complexity, operating challenges and cost inflation. I continue to be confident in our ability to manage the current operating environment efficiently and effectively. I'm energized by our organization's resilience and the opportunity in front of us as we enter the second half of the year. I'd also like to thank my fellow directors for their continued support and for their belief in our strategy and in our team's ability to deliver results through a historically challenging operating environment. And finally, I'd like to thank you, our shareholders, for your continued support of our team and our company and for taking the time to join us today. And with that, I'll turn the call over to Adrian for questions and answers. Thank you.

Thanks, John Paul, and thank you, Sheryl. So we've got a bunch of questions to work through here, John Paul. [Operator Instructions] So first, investors, we've actually got 3 questions from this one investor. We'll take these in turn. So how much of the cost pressure in the period have you been able to ameliorate through price increases so far? And what are the expectations over the full year?

So we've been able to offset some of the cost increases that we've seen in the front half of this year, not to the degree with which we will offset them in the coming in the second half of the year because of the pricing programs that were in place as we put in place at the end of last year and throughout the first half of this year, which will take effect in the Americas summer selling season as we work into the second half of the financial year.

Next question, a quick one. What portion of the cost pressures do you expect to be transitory?

Look, we believe that long term and medium term, there will be some portion of these cost increases that will be transitory. I think it remains to be seen when and how much. I think our team has done a wonderful job of stemming as much of the cost impact as possible early on through mitigating inbound costs. We've passed on, as I mentioned, a portion of it through pricing. I do believe that at some point in FY '22 or FY '23, we'll start to see some relief on some of the structural shipping costs, but it still remains to be seen when and if that will occur.

Next question, not surprised to see this one. Can you please speak about the remit given to Luminis partners? What are the options being considered, buyback, trade sale, et cetera?

Well, I'm not -- I won't speak to any specific outcomes at this point. The remit is to work just as we said, with the Board and with the management team to further unlock shareholder value for the company by the means that are necessary -- by the means available in the market. So we'll undertake that review more collaboratively, and we'll update the market in due course as anything becomes -- deemed it disclosable. But at this point, we're working our way through those options as we speak.

A question on the financials. I note that Gale had a benefit from foreign currency translation and the loss in the pcp. And the question is, why are these not a part of the normal P&L.

Yes. So I can take that one. So the -- I think this is referring to the translation of equity from our functional currencies to our AUD reporting currency. So those translations are recorded in other comprehensive income. They are not part of the NPAT.

Next question, another investor. Can you give us an idea on the distribution points gained in the Americas from 12 months ago?

Well, the national program that we mentioned for the core business in shade clock and shade sales is over 1,000 points of distribution across the national -- major national home improvement retailer, not so significant. I think that depending on how you would measure points of distribution, we'd like to think about them as the intersection between an item and a door. So one retailer one item is a point of distribution, we call it. And so there's many ways for us to increase distribution in that respect. So we can add pure new doors and access points for consumers but also expand our range offering inside those stores. I think we've done both over the course of the last 12 months. We've also been working to increasingly give access to our entire product range on our e-commerce partners websites, both pure-play e-commerce customers like in Amazon, but also through expanding our -- more of our product portfolio and making it available on websites like homedepot.com and homedepotcanada.com. So the teams doing, I think, a really good job so far to increase those distribution points, and there's still some plenty of runway to go to do that over the coming couple of years as well.

A quick question. Are you pulling the price increase lever in markets other than in the Americas?

Yes, we have. We've actually had price increases in place across all the markets for company-wide. And the attainment percentage is very healthy in terms of customers and pass-through. So I think we're pretty pleased with the results so far. There's still more work to do. And as we're able to -- as we're able to stem off the pricing, the inbound pricing impacts, we'll continue to manage that as we have, I think, pretty closely and tirelessly. We're unable to do that. We'll pass on pricing to our customers, and we'll work with them collaboratively to still drive value to consumers and end users.

Next question. Are there any options off the table with respect to the strategic review?

I think we're keeping an open mind throughout the strategic review. It's the nature of the process we've undertaken. And I think that we're open-minded to any of the options that would be available to us over the coming periods. But anything specifically I wouldn't be at liberty to speak to at this point.

Next question, and I think you mentioned this in your presentation, but can you comment again on the supply chain challenge you had in the B2B customers in ANZ?

So we faced 2 issues there, 2 primary issues. And I mentioned the pure shipping delays and the inability to transfer some goods from our supply bases across Asia and other parts of the global supplier network. So there's just pure shipping challenges, container availability, lack of available vessel lines coming from Asia directly into Australia. We've had to do some transshipments through that process, which adds complexity and time. And then there's been COVID-related issues across our supply base across those markets as well. The shutdowns either mandated or through -- unfortunately, through -- operate at some of the suppliers as well that have had constrained capacity. So just put a lot of complexity into the supply chain throughout the first half of the year. But I think we managed that reasonably well. We would have liked to be able to supply more material. The demand certainly was there. But I think the good news is we've got a really strong plan in place. We're starting now for this balance of this year and into the following half, the first half of FY '23 to preplan and prepare for this coming season. So I think we'll be in a different place going into this year, knowing the challenges that were there and have some risk mitigators in place in the event that they occur again.

Next question, what portion of the ANZ revenue relates to the record grain season? And do you see this trend of strong grain season continuing for a third year?

So it's a material portion of the result. I won't give any specific numbers on the total number. I think the indicators, though, that we're seeing and through the conversations that we're having throughout the agricultural sector right now, up and down the supply chain would indicate that this coming year is going to be another strong year. But again, we're talking about the weather as well as some other things. So it can be somewhat unpredictable, but it seems to be that the indicators suggest that it should be another strong-ish year is what we're saying.

One other question. The $8.5 million PBT feels ambitious. Is that based on January, February trading conditions and can you update what you are seeing so far?

Yes. Look, we're forecasting the business as we see it and what's coming at us right now. For those of you on the call that have followed our company, understand our Gale Pacific, how our business operates, the third quarter, that January through March period is where we really get the stores and the customer set for the coming summer selling season and the April through July period when a lot of that material sells through, certainly gets replenished. So we're planning for consumer demand levels that are somewhat subdued to last year's levels, but still strong in their sell-through rates because consumer demand is still relatively robust. And we have pricing measures in place. And so we think that's the right target for us to deliver for the back half of the year at this point based on what we can see. And if we've learned anything over the last few years, I think it's that we have to be nimble and adjust quickly as things change. And I think we've proven that we can do that, and we'll update the market at any point of any shifts, whether it be positive or negative, we'll let everybody know. But based on what we can see right now, we feel confident in that second half call.

I still got a few more questions here, John Paul, which is encouraging. How much of the additional costs is attributable to market conditions that we know that others have experienced? And how much was the strategic investment made to maintain customer service levels?

The majority of it was the market conditions, the overriding majority of it. So we made the strategic inventory investment and to service customers and the demand effectively. And some of that was just required because of the stretched days of in-transit inventory that were required in efficient shipping environment. So we -- I think we've done a reasonable job at service throughout that time frame, servicing in the mid- to high 90s across a lot of our customers throughout the last half, which is, I would dare to say, pretty good. That's a pretty good result most times of the year, let alone during the challenges we've been facing right now. So I think that some room to go on areas, but vast majority of that cost right now is market-based.

Next question could be one for Sheryl on working capital. Do you expect the investment in inventory to unwind as conditions reverse?

Yes. I mean I think a fair amount of the inventory build was for the Americas, and we do see that normalizing as we get into the summer selling season.

And just a final quick one. How material is the e-commerce channel in the Australian retail business?

It's small today. But I -- my view, I think, are in our view of our Australia team as well as that there's shifting consumer behaviors in Australia, driven by some of the forced buying pattern changes over during the last few years. And our belief is that e-commerce is going to grow in many markets around the world for the foreseeable future. So it's a small part of our business today. But at the same could be said for the U.S. business about 10 or 12 years ago, and now that channel represents about 1/3 of the regional revenue today. So we think it's a growth stream across many of our markets and a growth channel, and we'll take the -- our expertise from the -- building the U.S. e-commerce business and share shamelessly with our Australian business to grow that business more quickly. Similarly to how we've taken our understanding of how to operate our core shade fabrics business operating with Bunnings for many decades and then taking that footprint and that game plan and bring it into the United States and working with customers like Home Depot and Lowe's. So I think that's one of the benefits of a company like ours where we have some repeatable models that we can bring into new markets and can grow our business. And hopefully, we're able to put some of our business developers and their plannings in the coming 6 to 12 months, and we can develop some additional markets for the company over this coming time frame because we believe that the opportunity is there for us to take advantage of over time.

I think we've exhausted the group. So we've run a question. So back to you and for final remarks.

Yes. Thanks, Adrian. And I appreciate everybody's engagement with the questions. That's probably the most questions we've had on these calls for a while. So it's encouraging just to hear them, and thank you. And I just wanted to say to everyone in closing, again, thank you for your time and for joining us today. And as we outlined the company's first half results, our company strategy and the second half outlook. And if there's any further questions, please feel free to reach out to us at your chosen way and all the best to you and yours. I hope you stay safe and healthy. And we look forward to speaking to you again at the release of the company's full year results later on in 2022, if not sooner. So thank you again, and have a great day, everyone. Thank you.