Gale Pacific Limited (GAP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Gale Pacific FY '24 earnings release. [Operator Instructions]. I would now like to hand the conference over to Mr. Troy Mortleman, CEO. Please go ahead.

Thank you, Harmony. Good morning, and thank you for joining us today. My name is Troy Mortleman, and I've been recently appointed as CEO of Gale Pacific but have served the company for 4.5 years in my prior role leading our Australia and New Zealand business and our developing markets regions. Joining me today is our Chief Financial Officer, Sheryl Smith. And together, we will step you through our performance for FY '24, highlighting key financial drivers, regional results, and our strategic direction for FY '25. At the conclusion, we will take any questions that you may have. Gale Pacific has been at the forefront of fabric innovation for over 70 years. We design and produce sustainable, technical, and industrial fabrics built to withstand the harshest environments on the planet. Our products span a wide range of industries from agriculture and construction to consumer goods with our consumer brand Coolaroo being synonymous with outdoor comfort and sun safety. Our innovative and sustainable fabrics are trusted worldwide, and we continue to expand our reach across diverse markets. Gale Pacific operates a truly global business with presence in key regions across Australia, the United States, and the Middle East. Our operations are supported by a strategic manufacturing and distribution network, enabling us to meet the demands of our diverse customer base. Our vertically integrated manufacturing facilities in Ningbo, China, and Melbourne, Australia allow us to effectively service as their customers across the globe. Today, Sheryl and I will provide an overview of our financial results before I take you through our regional performance, our strategic direction and provide an outlook for FY '25. Moving on to the macroeconomic backdrop, FY '24 presented a number of challenges for our business. Adverse weather conditions impacted our revenue across both agriculture and consumer markets in Australia, particularly across the first half of the year. The supply chain disruption experienced as we exited the pandemic resulted in customer destocking in the United States across the second half of FY '23, and this persisted into the first half of FY '24. Increased inflation and persistently higher mortgage rates in the United States also constrained spending on home improvement projects. Cost of leading pressures across our core markets of the United States and Australia were also prevalent as discretionary spend on household durables contracted. This resulted in reduced sell-through rates across our major retail partners in both the Australian and United States peak trading periods, which negatively impacted revenue. Now, to the results. We are very disappointed with the financial results delivered in FY '24, which are well below our expectations. Revenue declined by 7% to $174 million, and our earnings before interest, tax, depreciation, and amortization fell by 31% to $14.2 million due in part from the shortfall in revenue, but largely from increased operating expenses, which drove lower earnings. I will now invite Sheryl to detail the drivers of our performance. Thank you. Sheryl?

Great. Thank you, Troy. Yes. So, as Troy mentioned, our net revenue for the year of $174 million was down about 7% compared to FY '23. Troy will go over the regional results momentarily and get into some of those specific drivers behind that. EBITDA came in at $14.2 million, that was down about $6.5 million compared to FY '23. And our PBT or profit before tax was a loss of $1.4 million. This is compared to $5.3 million in FY '23. As Troy noted, on the profitability lines, we did see higher operating expenses in FY '24. It was about $6.5 million higher than the prior year and a big piece of this was driven by our spending on our new ERP platform. There was about $5 million that impacted our profit related to the D365 project. If we can move to the next slide and talk about the cash. So, net cash from operating activities came in at $26.7 million. This was up from $8.4 million in FY '23. And that increase was primarily driven by our working capital management. And then our net debt finished quite strong at the end of FY '24 coming in at $0.7 million. This is an improvement over FY '23, which was a net debt of $15.5 million. The net debt figure of $0.7 million was really helped by a more efficient facility structure with our new banking partner, HSBC Bank that was put in place during the year, as well as disciplined cash management in the working capital management that I mentioned a moment ago, and that does include the ERP investment that we made as well. So, with that, I'll turn it back over to you, Troy, to talk about the regional drivers.

Thank you, Sheryl. So, let's take a closer look at our performance by region. In the Americas, we achieved $85.4 million in revenue, which was a 7% decline compared to FY '23. EBITDA declined by 20% across the year due to lower revenues, combined with the one-off shared costs associated with the implementation of our Microsoft Dynamics 365 ERP platform. However, we made significant strides in expanding our market presence, particularly with the national launch of outdoor roller shades with heat shield technology at Lowe's and the expansion of placements in the pet category at over 1,400 Walmart stores across the United States. Our team also made solid progress in expanding our reach into Latin America with 81% revenue growth in this important and strategic market for the company. We also completed the outsourcing of our custom roller shade production in the first half of FY '24, which lowered overall costs and enabled scalable capacity to service additional growth. In Australia and New Zealand, revenue was $73.9 million, down 10% year-over-year. EBITDA was 42% lower than FY '23, again driven by lower revenues and shared costs associated with our ERP transition. Poor weather conditions across the first half of the financial year negatively impacted demand for our coated fabrics associated with grain storage as well as sell-through of our consumer products through our retail partners in the height of the peak trading periods of December and January. Encouraging margin growth was experienced from the launch of a new umbrella range at Bunnings and improved category mix in our commercial segment. Inventory fell by 11% compared to the prior year, thanks to the diligent work from our supply chain teams to improve forecasting and lower lead times. Throughout quarter 4, an exclusive distribution agreement was secured with Australia's largest distributor of print consumables for our fully sustainable, flexible banner material, Ecobanner. This, alongside encouraging results from field trials for our coated grain cart fabric produced with closed-loop recycled content will drive share growth in the region throughout FY '25. Our developing markets returned to revenue growth with a 10% increase year-on-year, whilst EBITDA in the region fell by 12% due to one-off share costs from our ERP implementation. Underlying profitability grew in the region from improved margins combined with a low operating cost base. After some challenging years in recent times, our revenue in the Middle East increased by 38% as the combination of market recovery in commercial projects, combined with increased conversion to our shade fabrics in the government sector grew share. Disciplined credit management from our team resulted in significant reductions in outstanding data balances with improved customer payment cadence resulting in minimal levels of age balances being carried forward. Encouraging revenue growth in the Commercial shade segment was also recorded across our European market, which offset ongoing consumer sell-through declines from our retail partners in Japan. As we look ahead into FY '25 and beyond, our strategy is anchored on 2 core principles: innovation and sustainability. Developing meaningful consumer-led innovation has been at the heart of our business across our 73-year history and remains a core tenet of the company today. Innovation, however, is also extended into how we operate as we look for improved and more efficient processes and ways of working. Sustainability is central to our value proposition to our customers and end users as we continue to push the boundaries of what is possible within providing a truly sustainable product solution for our customers. However, our strategy is also set on delivering sustainable earnings, which is the central focus for my team and I to deliver into FY '25. Our team's activity is directed across 4 key strategies. We must sustain the market leadership position built over many years in Australia and New Zealand. Driving profitable growth in the Americas is central to achieving our growth ambitions as is expanding our presence across developing markets. Ensuring we have an optimized and efficient global operating footprint will also ensure that we effectively manage costs and provide scalability for growth. We remain committed to delivering material and profitable growth opportunities in the Americas as our largest addressable market for the company. We have a well-established presence that has been built across the last 35 years with our Coolaroo branded consumer products being available from some of the world's largest retailers, such as Lowe's, the Home Depot, Amazon, and Walmart. This presence driven by a highly capable team assembled across the last 2 years following a relocation to Charlotte, North Carolina, provides us with a solid foundation to build from. Our primary focus in the Americas is to drive share growth with more profitable products in more places, both with our existing customers by increasing the amount of stores we are placed in as well as developing partnerships with new customers where our proposition is meaningful. We will continue the work from FY '24 to expand our presence in Latin America and have commenced work to refresh our websites to improve conversion across consumers and end users towards our proprietary products. The commercial segment also provides a material growth opportunity within the Americas. We plan to launch a shield technology embedded in our commercial shade fabrics as well as leverage the market position we have in Australia across agriculture and horticulture industries to replicate in the United States. Our team is also working on developing new consumer-led innovations to leverage our existing capability and allow us to enter new categories. This work will progress throughout FY '25 as we validate our proposition amongst both consumers and our customers. In Australia and New Zealand, our focus is on optimizing our operations to improve margins and maintain our market leadership that has been built over a 73-year history. We're implementing rigorous category management to improve or exit lower-margin products and will drive efficiencies across our manufacturing and distribution operations. We're also focusing our team on improving our cost position for both manufactured and sourced products. We have material share expansion opportunities within the commercial segment in Australia, particularly across the agriculture, horticulture, and water management categories. We'll leverage the encouraging results we have achieved thus far with coated fabrics produced with recycled content for the grain industry alongside of our fully sustainable flexible advertising [ Bato-fabric ] in Cabana to drive conversion and share growth with their customers. Protecting our leading share at Bunnings is crucial with the launch of an expanded range of heat shield products and placements alongside brand development work to encourage consumer conversion central to our activity. Expanding our business outside our core markets of the Americas and Australia is essential to realize our growth ambition. We plan to make modest investments throughout FY '25 to uncover complementary new markets where our value proposition is relevant and gives us a right to play and win, utilizing our existing infrastructure in Dubai as a base to build from. By leading with meaningful and differentiated innovation, combined with our credibility earned in consumer markets in the United States and Australia, we aim to build consumer share with our Coolaroo brand across physical and e-commerce channels. We are particularly focused on the Middle East, where we have over 20 years of established credibility and where we have seen encouraging growth across FY '24. Building on successful trials of our HeatShield commercial fabrics installed in some of the world's most demanding conditions, we aim to generate specification conversion, particularly across the government-funded project space in the UAE and Saudi Arabia. Our success in the Middle East will serve as a model for expanding into other developing markets, ensuring that we continue to grow and diversify our revenue strengths. To support our growth ambition and to effectively manage costs throughout our operations, we are working to optimize our global operating footprint. This includes implementing a global customer contact center to improve our customer experience by adopting a follow-the-sun operating model, utilizing our teams in the United States and Australia to cross-service our global customer base. On the operational side, we are enhancing production planning to maximize capacity efficiency and benchmarking the products we manufacture at our facilities in China and Australia to ensure that we're achieving loss possible cost. Our team will also continue our work to improve quality and reduce waste through our manufacturing facilities and uncover new manufacturing partnerships outside of Asia to complement our existing capabilities. Finally, we are defining an appropriate United States distribution model to service our growth at the lowest possible cost. Underpinning the delivery of our strategy are 4 foundational tenets, safety is our top priority with the physical and mental well-being of our team at the core of everything we do. Financial discipline is required to balance investment for growth, ensuring that we deliver a low-cost operating structure to maximize profitability. Our transition to Microsoft Dynamics 365 will help deliver secure and efficient operating systems and a commitment to developing our talented team across our group to thrive and be the best that they can be is unwavering. Whilst our financial performance for FY '24 was disappointing, Gale Pacific has core differentiated elements that position us for growth. Our sustainable product portfolio features meaningful and consumer-led innovation that improves the lives of our end users in growing market segments around the world. We have deep partnerships with our customers across both consumer and commercial segments with a mutual ambition to create shared value and a vertically integrated manufacturing capability alongside our technical fabric's expertise, gives us the ability to deliver high-quality, innovative products to our customers every single day. So, looking ahead to FY '25, we expect challenging trading conditions to persist as the prolonged impact of inflationary pressures on household budgets continues to constrain consumer spending. My team and I are committed to driving earnings growth for the company. We plan to address higher operating costs in FY '24 by implementing a simplified and lower-cost operating structure that will reduce complexity across our business whilst not impeding our growth ambition. We expect to return to profitability in FY '25 as we continue to implement our strategic initiatives, and we will be providing additional performance guidance at our upcoming Annual General Meeting. So thank you for attending today's briefing. We appreciate your continued support of Gale Pacific and look forward to delivering an improved financial performance in FY '25. But Sheryl and I are now happy to take any questions that you may have.

[Operator Instructions] Your first question comes from James Tracey from Blue Ocean Equities.

Congratulations to Troy on becoming CEO. Can you just give an update on this ERP implementation, the $5 million of costs that were incurred? Is that implementation finished? What sort of level of cost do you expect to see in the future from that?

Yes. Thanks, James. Good to talk to you again. Yes, our ERP implementation is going well. We're on track for a go-live on the 1st of October. So, originally, we were going live in Q4, and we've just made that decision to go live in October to make sure that we can get that right for our customers. So, from a cost perspective, there will be approximately between $2 million to $2.5 million of costs incurred in FY '25, but we're always on track. We're in user acceptance testing right at the moment. Everything is on track for 1 October.

And then also with regards to the strategy, I mean, the past couple of years, it's been a growth strategy that hasn't really worked, revenues are lower than what they were. Will you be shifting more, I guess, to trying to optimize the business to make profits within the revenues that you got $175 million revenues, a lot of revenue, a lot of profit potential, I guess?

Yes. I think we're trying to do both, James. I mean, we're still trying to grow share, particularly in large addressable markets like the U.S. and where we can find meaningful share outside of the U.S. and Australia. But also, too, we've got a big focus on improving margins and lowering costs, in particular. And so, if we can do both at the same time, we're not just relying on one or the other, we still have high ambition for material growth opportunities in the U.S., the scale and the size of that market and the position that we have there positions us well to be able to deliver that through innovation. But at the same time, we need to make sure we've got an appropriately sized cost base and that we can improve our margins so that we can get both on both sides.

And just with regards to the cash flow, cash flow, $26 million, very strong results. And then if you go back through the history, there's been a few different years in the past we've generated, for instance, FY '21, you generated $35 million of operating cash flow. So, the business does produce a lot of cash, I guess, irrespective of what the margins are doing because you've done a good job around the working capital, I mean, is that the level of cash, something that you would hope to achieve going forward given that you've got lower IT costs going forward once this implementation is done and presumably some other profit improvement measures?

Yes. Thank you, James. So, yes, finished the year quite strong with operating cash flow. When you look at some of the working capital changes there that have helped us, I would point out inventory. So, as Troy mentioned, in the first half of FY '24, there was still some of the inventory destocking at our customers. So, our supply chain team has done an excellent job at managing our inventory. And so, you're seeing that in some of the working capital that impacted us in FY '24. So, our inventory is now -- we finished the year around $46 million. So, I think that's sort of where I would expect us to stay. I think that with the normalization of supply chain and lead times, I think that we'll continue to be at those lower levels. And then the other working capital, the payables, I mean there is a touch in there in FY '24 relating to the ERP. So, if you think about the higher spending that I mentioned, some of that spending was sitting in payables at the end of the year and with accounts receivable as well. Some of that is just the sort of Q4 in the Americas year-over-year as the payment terms are a little bit longer in the U.S. than they are in Australia. So, some of that will just depend on what the sales look like in Q4 as well. But the expectation would be to continue to have strong, to your point earlier, to have that strong cash flow going forward.

And could you talk a bit about the growth rate as it progressed throughout the year? I think, particularly in the U.S., it looks like there was a better second-half growth rate. And you sort of mentioned customer destocking at the beginning of the year. I'm just wondering if that's finished and if that's leading to higher sort of current, more recent growth rates.

Yes. So, it was a real sort of tale of 2 halves, I think, James, I mean in the first half, it was particularly impacted in Australia with the weather. We had a very poor grain season last year, also to some of our water management fabrics also experienced declines through share or market contraction through the cost of living crisis and things like that. And then the weather throughout that December and January period really impacted. So, that started to ease as we got into the second half, similarly into the U.S. So, destocking initiatives really started to cease in that first half. And we saw better run rates coming through. But what we did see coming into the peak of the North American peak season, which is across sort of April, May, June, July, we certainly for May, June as we saw some of those sell-through rates start to impact less about destocking, but more about those persistent high inflation rates that just sort of put a bit of a dampener on consumer spending. So, there was really, I guess, 2 sort of key elements. As one started to ease, we started to see the impact of some other macroeconomic headwinds that impacted our sell-through.

I mean, I haven't done the calculation here, but I think in the first half, the U.S. business was down 21% and then the full year, down 7%. Therefore, that would imply up 10% or something year-over-year in the second half, something to that extent. I haven't done the calculation properly, but I guess is that second-half growth rate, is that sort of indicative of what you're seeing sort of going forward? And the other thing, if you have any indications on what the sell-through rate for the customers as a potential, I guess, leading indicator.

Yes. So, we had some new placements going in across the second half in the United States. So, those generally sort of get loaded in across Q3. And so, as we continue to increase some of that share with where we'll be able to pick up some of that business. We've also seen some strong growth in our commercial segment in the U.S. as well. So, we've seen some increased share being delivered which generally comes into that second half as well. So, that's the increase, I guess, on the revenue side. Those sort of rates of sell-through have sort of continued going through into the back half of the year and sort of coming into the first part of this year. So, we'll remain to be seen as we get further into FY '25, how that progresses.

Your next question comes from Paul Stewart Campbell, Private Investor.

Well, my question is just about the management. Is it your plan to have a new Australian manager? And the other question really relates to, you had a CEO and a financial officer in Charlotte and that's going to go, what are you going to do to kind of potentially fill that gap in North America?

Yes. Thanks, Paul. Thanks for your question. So, I'll be still maintaining my role as General Manager of Australia and New Zealand. So, I'll be able to do both of those roles. From a leadership perspective, what we're trying to do is to create a balance. I don't consider something we're an Australian listed business. We have an Australian Harrier, but we're an international business. We just happened to be founded in Australia. And so, I want to make sure that we have appropriate leadership and executive leadership right across our group. And so, we're going to have a balance. It won't be all coming back to Australia. We have a very, very good and experienced leadership team in place in the United States led by our General Manager of Americas, Chris Gibson, out of Bacheli is our supply chain lead as well at Brown on IT. And so, that gives us a good balance now. And they're very experienced leaders in that market. And so, he'll be retaining that presence because that's very, very important for us to be able to do that. And so that's my philosophy going forward.

[Operator Instructions] The next question comes from Anthony Davis from CPS.

Look, thanks for that update, Troy; obviously, Sheryl, but this company, if you followed it for the last 15 years it has been an absolute disaster. You talk about innovation, the same stories, the same angles and there's a lack of transparency with this company. You've talked about all the things that went wrong in the U.S., whether it's weather, inflation, whatever you want to say. But can you give us one -- the first question is, why did the Board lose faith in John Paul, right? What went wrong? U.S. was supposed to be the long-term strategy. We've spent money to relocate. Was that strategy wrong? Was it the person that was wrong? So, we need some clarity with that. And the second question is, as the CEO, the only thing we've had, I think, about 6 CEOs over the period of time, and we keep changing, the Board seems to stay the same, and they're the ones that have made the decisions. So, I'd also like of any of the Board members when are we going to get Board renewal because this company, I think shareholders are psychotic users. So, 2 questions.

Thanks, Anthony. Well, actually, it's not appropriate for me to comment on the leadership change. That question would need to be directed to our Board of Directors. But you're right. I mean we haven't delivered consistency in earnings. We haven't delivered consistency in results. The decision to expand into the United States, I still believe is the right one. It is a significantly large addressable market size, much larger than Australia. And when you consider our presence at Bunnings for argument's sake, where you walk into a Bunnings store and I call it the great wall of Coolaroo. We have a significant penetration of share at Bunnings, but there are only 350 stores. There are 1,800 Lowe's stores. There are 2,000 Home Depot stores. We don't have the same replicated presence in those stores as what we do in Australia. A good example of that is our prefabricated shade sale products. We have been dominating in that market here in Australia for many years, and we hold about 9 out of 10 products available at Bunnings in that category are ours. But yet when Lowe's decide to have a trial and put that into 800 stores, the first year of that product delivered 30% more unit growth than what Australia's record sales have ever been. And so, that demonstrates the scale and size and opportunity in the United States. So, we've relocated our operation from Orlando to Charlotte, that gives us a better opportunity to recruit different talent and different capability to be able to grow. It's close to our customer head offices so that we can then have more meaningful conversations with them, but it's about making sure that we have the appropriate investment behind that as well to be able to service that whilst that continues to sort of takeoff. I mean, we have seen the normalizing of consumer demand as well coming through over the last couple of years off the back of the pandemic in both of our core markets. And so, that certainly has been the case. And so, our focus now is on making sure that we can grow share in those markets to look at our cost base as well to make sure that we've got that appropriately sized and also variable enough so that we can withstand some of these more macroeconomic indicators that keep on coming at us that do impact our revenue. So, our strategy, I think, is down. We need to make different decisions on our investment base in particular, and we need to be more balanced in the way that we approach our growth ambition. But I certainly believe that we have the foundation in place. We just need to get some of those things right, which is what really the job that I'll be doing over with our team over the next 6 to 12 months so that we can get that right and deliver better returns and resource some confidence.

But you keep talking about the macro conditions, but then you changed the leadership. Sheryl, I think you're going, and I think your last day today or you leave tomorrow, I mean, what were the management decisions that you saw that were wrong? John Paul was a great savior, where he got issued a lot of shares and options, which diluted everybody. I think the shareholders need to know what went wrong.

Well, yes, Anthony, I think, as I mentioned before, it's just not appropriate for me to comment on those decisions. They're not my decisions to make. But I'd certainly be happy to have a conversation with you in a different forum to be able to maybe address some of those differently.

There are no further phone questions at this time. I'll now hand back to your speakers to address your webcast questions.

Thank you, Harmony. There's just a couple of questions here. One is just around talking about cost-out and what's the dollar amount of cost out. And so, we'll be reviewing that. There're 2 elements to that sort of question. One is around what we're doing on margin and what we're doing around operating costs as well. So, we're continuing our program of what we've been doing over FY '24 to reduce cost in operations to be able to improve margins. There's a lot of work that's been done there by supply chain teams in both manufacturing facilities to be able to do that. So, I don't have a specific figure for you on that as well. The same thing on the operating cost side of things as well. I'll be reviewing that with the team across the next couple of months, naturally just being appointed to make sure that we've got those things in place. But it won't be at the expense of growth. We have got a corporate cost structure that is complex. And so, we're looking to simplify that. We have simplified some of those things already, and we'll continue to do that as well to make sure that we give ourselves that headroom to make sure that we can deliver better profitability going into '25. And then, I think there's a question there, Sheryl, which I might give to you just around how much drawn debt do you expect to carry over into FY '25? And have you any capacity to decrease its utilization? So, can I give that one to you?

Yes, absolutely. Thank you, Troy. Yes. So, obviously, our balance sheet is in really good shape. Net debt ended the year at 0.7%. Looking forward, we do expect or anticipate improvements even to that number. There are a couple of attributes of our new facility that are still being put in place. And once those are complete, we do expect to see increased efficiencies in our new facility structure as well. Thank you.

Thanks, Sheryl. And I think that's the last question. No, that's the last question. Okay. Thanks, everyone, again, for joining. Our focus is on delivering a better financial result into FY '25, and we look forward to speaking with you all again at our Annual General Meeting coming up soon. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.