Gale Pacific Limited (GAP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Gale Pacific HY '25 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 afternoon, and thank you for joining us today. My name is Troy Mortleman, CEO of Gale Pacific. Joining me today is our Interim Chief Financial Officer, Arjun Bagawandas. This afternoon, I will step you through our performance for the first half of FY '25, highlighting key drivers, segment results and our outlook for the balance of the financial year. At the conclusion, Arjun and I 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. As part of our growth strategy, we have expanded our presence in Latin America by establishing new distribution partnerships in Mexico and Argentina. 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 our customers across the globe. Today, I'll provide an overview of our financial results before taking you through our segment performance and provide an outlook for the remainder of FY '25. So to the results. We are encouraged by the positive financial results delivered in the first half of FY '25. Revenue increased by 18% to $90.7 million, reflecting solid growth across all our operating regions. Earnings before interest, tax, depreciation and amortization increased by $3.1 million to $5.6 million, aligning with the guidance provided at our Annual General Meeting. When adjusting for nonrecurring costs associated with executive leadership transitions and the implementation of our new ERP platform, Microsoft Dynamics 365, normalized EBITDA reached $10.3 million, representing a $7.8 million improvement compared to the prior period. At the close of the first half of FY '25, net operating cash flow was negative $2.4 million from a positive $19.6 million in the prior period. This variance was primarily driven by higher working capital requirements as we strategically increased inventory levels to support growth initiatives in the second half of the year. Additionally, higher debtor balances reflecting increased revenue, contributed to the shift in cash flow. As a result of these working capital movements, net debt increased to $7 million compared to $2.2 million in the prior period. Turning to the key drivers of our first half performance. We continue to expand our presence in the U.S. market with new product placements strengthening our position across key retail distribution channels. Additionally, our Commercial segment delivered record sales for the half, reflecting increased demand for our high-performance fabric solutions. Our performance in Australia was driven by increased demand and market share gains in grain storage fabric. We also achieved record sell-through at Bunnings in December, reflecting improved consumer demand for our premium outdoor products. Our Middle East operations saw strong revenue growth, particularly in Saudi Arabia, where we increased market share while maintaining strict credit discipline. Despite positive operational performance, we encountered headwinds from a stronger U.S. dollar late in the half, which impacted profitability. Additionally, onetime costs related to the implementation of our Microsoft Dynamics 365 ERP platform and executive leadership transitions contributed to higher expenses in half 1. Our investment in D365 will be foundational to improving long-term operational efficiency and business scalability. The new platform was successfully implemented in October with no impact to overall service delivery to our customers. So let's take a closer look at our performance by segment. In the Americas, we achieved $31.4 million in revenue for the first half, which was a 6% increase compared to the prior year. EBITDA increased to $6.1 million from $2.2 million last year, driven by margin improvements and lower operating costs, enhancing overall profitability. Despite a challenging consumer environment, we achieved strong market share gains in our retail channel with new product placements in over 2,300 stores, including over 1,000 Home Depot locations for our HeatShield roller shades. We've secured new supply agreements with one of the largest home improvement retailers and second largest pet retailer in the United States with revenue contributions expected in the second half. Our Commercial shade segment hit record sales, reflecting growing demand for our high-performance fabric solutions. In Latin America, growth accelerated through the launch of 2 new distribution partnerships in Mexico and Argentina, expanding market access for our consumer and commercial products. We also improved margins through product mix optimization and the benefits of outsourcing custom roller shade production. Finally, disciplined cost management has maintained operational efficiency whilst continuing to grow -- to support our growth strategy. In Australia and New Zealand, revenue was $52.3 million, a 23% increase from last year. EBITDA of $8.9 million was 37% higher than the prior period, driven by improved margin flow from higher revenues. Grain storage fabric sales saw significant growth, fueled by strong demand from core customers and expanded market share across the East Coast. 1/4 of our total volume in the half came from closed-loop recycled fabric, a significant progression in our sustainability commitment. We achieved a record December sell-through at Bunnings, enabled by strong inventory fulfillment, ensuring we met improved peak season consumer demand. Our presence at Bunnings New Zealand expanded with increased shelf space secured through the implementation of a harmonized Trans-Tasman product range. We also experienced strong growth in paper contract coating and horticultural project volumes, contributing to the diversification of our revenue streams in our home market. Our developing markets delivered strong growth in the first half with revenue increasing by 50% compared to the prior year. EBITDA was $2.3 million higher than last year, with improved margins and a low operating cost base accelerating profitability. In the first half, we expanded our sales team in Saudi Arabia, which played a key role in growing revenue and market share and securing new commercial project specifications for our premium architectural shade fabric. In the United Arab Emirates, our team successfully grew revenue and improved margins while making significant progress in reducing outstanding debtor balances, which declined 55% year-over-year. In Europe, we saw significant revenue growth, fueled by early shipments to distribution partners in Spain and Italy, allowing us to maximize peak trading opportunities in the second half. Moving to other items. Overall corporate costs for the half increased by $2.8 million, driven by $4.7 million of nonrecurring costs related to the implementation of D365 and executive leadership transition. As these onetime expenses wind out, we anticipate lower corporate costs in the second half, contributing to an improved cost position in FY '26. We incurred an FX expense of $2.3 million for the first half compared to a $0.4 million gain in the prior period. The majority of this impact was noncash, amounting to $1.4 million for the half. Looking forward now to the second half of the year. In the Americas, we anticipate continued revenue growth, supported by year-over-year retail share gains and additional revenue from new customer acquisitions secured in the first half. However, we remain cautious about the potential headwinds from tariff increases, which could influence consumer sentiment and underlying demand as we approach our peak trading period. In Australia, we anticipate softening demand across some commercial segments, which may negatively impact revenue in the second half. We expect strong momentum to continue in the Middle East, particularly in the United Arab Emirates and Saudi Arabia, where we have secured key project wins and will benefit from expanded market share. We remain committed to disciplined cost management and expect benefits from structural improvements to drive savings into the second half. For the full year FY '25, we expect EBITDA to range between $18 million and $20 million, reflecting a $3.8 million to $5.8 million improvement over full year FY '24. In closing, we are encouraged by our first half performance, and the market share gains that we have made across all key regions, but particularly in the Americas, which continues to present substantial growth opportunities for the company. Thank you for attending today's briefing. We appreciate your continued support of Gale Pacific and look forward to continuing our positive momentum for the remainder of the financial year. Both Arjun and I are now happy to take any questions that you may have.

[Operator Instructions] Your first webcast question comes from Scott from Milson Capital, who asks, can you elaborate on the larger FX expense versus PCP? Was this due to hedging? With the weaker Aussie dollar versus major currencies, are you adjusting hedging plan at all?

And thanks for the question, Scott. So this was really due to balance sheet revaluation impacts from intercompany balances, which are predominantly in USD. And then the cash impact of that is due to our maturing CNH and USD hedges. So we operate with a hedging policy that's been in place now for 7 years. That's something that we are in the process of reviewing to ensure that we have the right policy in place to be able to manage this ongoing. So one, of course, we're not in the business of speculating on currency movements. And with that significant depreciation, particularly of the Australian dollar against the U.S. dollar and strengthening against the CNH as well, that's what really drove the FX result for the first half.

[Operator Instructions] Your next question comes from Scott from Milson Capital, who asks, what approximate annual IT expense in Australian dollar can we expect going forward?

Yes. Thanks again, Scott. So of course, our IT expense has been largely dominated by the implementation cost for D365. So the majority is -- with that system now implemented in October, we do have some stabilization costs that sort of came through towards the back end of the last half and will have some residual impact as we go into Q3. But we expect by the time we get to Q4, we're in a steady state in a normalized view. So of course, all of those additional one-off costs that we've been able to incur this year will back out and we get into a steady state. So it will be significantly reduced from what we've experienced, particularly this financial year and of course, the back end of last financial year as well.

There are no further questions at this time. I'll now hand back to Mr. Mortleman for closing remarks.

Okay. Thanks, Harmony. Thank you to everyone again for attending the briefing. As I mentioned, we're really encouraged by the performance of the company in the first half, and we've got some positive momentum heading into half 2 and into FY '26. So thank you for your attendance, and have a good rest of the afternoon.

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