Gale Pacific Limited (GAP) Earnings Call Transcript & Summary

Good morning, and thank you for attending the GALE Pacific Limited H1 FY '26 Results Briefing. Speaking today will be GALE Pacific CEO, Troy Mortleman; and CFO, Dexter Clarke. After this morning's presentation, Troy and Dexter will answer any questions you may have. [Operator Instructions] Now I would like to hand over to our presenter today, GALE Pacific CEO, Troy Mortleman.

Thanks, John. Good morning, and thank you for joining us today at our results briefing for the first half of FY '26. My name is Troy Mortleman, CEO of GALE Pacific. Joining me today is our Chief Financial Officer, Dexter Clarke. This morning, I'll provide a brief overview of who we are at GALE Pacific before highlighting our strategic direction and sharing the key achievements we've made in the first half. I'll then step you through our first half performance, both as a group and by region before outlining our key priorities and outlook for the remainder of FY '26. As we enter 2026, GALE Pacific now marks 75 years of experience in technical textile and shade innovation, applying engineered performance to real-world applications across a range of end markets. That heritage underpins both our credibility with customers and our ability to adapt as conditions change. Our business is vertically integrated with manufacturing and global distribution capabilities that allow us to control quality, manage complexity and respond efficiently across regions. We operate across consumer, commercial and industrial markets, providing diversification by channel while remaining focused on the shade category where we have deep expertise. Our products arrange with major global retailers such as Bunnings, Lowe's and the Home Depot and are increasingly specified in commercial and architectural applications where performance, durability and compliance matter. In parallel, we continue to build scale in industrial and agricultural segments where our technical fabrics play a critical role. GALE Pacific is a pioneer in closed-loop recycling within our category, and we continue to extend this capability across our product portfolio as customers and regulators place greater focus on end-of-life product solutions. So before turning to our performance, I want to briefly reinforce our strategic direction and highlight the progress we've made against our key priorities. Over the past 6 months, we've released our sharpened strategic direction within the organization to support sustainable growth and deliver improved returns. We're anchoring our future growth around the shade category, a segment where GALE Pacific has deep expertise and one in which we currently have presence in every one of the 40 countries we serve. While our technical performance in our fabrics has established a strong market position, our next phase is about moving beyond just selling shade products to providing complete shade solutions. This means leveraging end user insights from both consumer and commercial markets and translating them into meaningful innovation, whether through product development or content that makes the entire experience seamless from research to purchase, installation and maintenance. Our purpose is now clear; to enrich lives through shade. This fuels us to deliver our ultimate vision to make shade as fundamental to outdoor life as sunlight. This clarity now provides our organization a unified direction for growth. We're focusing our activity across 3 pillars. First is culture. A strong safety record, high employee engagement and continuous improvement mindset. Second is innovation. End user-driven, solution-focused and positioning our brands as the first choice in their respective segments. And third is growth. Expanding channels in existing markets, building new product and digital partnerships, and targeting climate appropriate regions where our solutions deliver clear value. Driving operational efficiency and delivering sustainable profits remain central to our approach. Financially, we're measuring ourselves across 3 key outcomes: expanding margins, growing EBITDA and improving free cash flow. This strategic framework is now embedded across the organization. It provides clarity on where we play, how we win and how we allocate capital and management focus. Importantly, it also underpins the decisive actions we have taken over the first half of FY '26 to simplify our operating model and strengthen cash generation. At our full year FY '25 results briefing in August last year, we identified 2 major areas of action for FY '26, resetting our Americas operating model and diversifying our manufacturing footprint beyond China, and we've made significant progress on both fronts. Starting first with the Americas operating model reset. We've completed a 24% reduction in our total U.S. workforce, focusing on streamlining administration and management roles. This has allowed us to simplify our operating structure, reduce overheads and improve decision-making speed. These actions are delivering tangible benefits with $3.1 million in cash savings expected for FY '26 and recurring annualized savings of $3.7 million. We're continuing to explore additional cost-saving measures to ensure we remain agile and responsive in a changing market. We're also well underway with our manufacturing diversification program and have reached several important milestones. At the end of the first half, we successfully piloted roller shade fabric production in Thailand and are now actively working through commencing roller shade assembly trials with our Thai partner as we progress through 2026. These milestones mark a critical step in helping to mitigate our exposure to U.S. tariffs and strengthening supply chain resilience. Our U.S. customers have responded positively, supporting our progress and the time line for implementing these changes, which are complex. In parallel, we're actively reassessing our China manufacturing cost base given softer volumes, prioritizing the warehouse consolidation and workforce optimization. And this initiative is expected to deliver additional cost improvements as we advance our diversification efforts. So as part of our strategy to deliver complete shade solutions, we have invested in new digital platforms that will enable conversion and commerce across both our consumer and commercial channels. On the left-hand side is our refreshed Coolaroo website, which now provides a globally harmonized digital experience for consumers. The addition of e-commerce capability is a key step forward, making it easier for customers to research, compare and purchase products online. Improved site navigation and expanded content will make it easier for consumers to compare products, to access project inspiration and to find practical guidance for their outdoor spaces. The new site went live in the U.S. at the end of the first half with our first online sales being achieved as we exited 2025. And on the right-hand side is our new GALE Commercial platform, which establishes a distinct identity for our commercial brand. This site features enhanced technical content, detailed specifications and application guidance tailored to the needs of architects, specifiers and commercial partners. A key highlight of the site is the capability to feature global case studies, which showcase the value that GALE is delivering today across multiple commercial segments, whether that'd be from large-scale infrastructure and architectural projects to specialized applications in agriculture and horticulture. This new platform will also connect end users directly with our commercial fabricator network, streamlining specification, project support and delivery. And this site is now live and positions GALE Commercial as the go-to resource for engineered technical textile and shade solutions. So let me now take you through our results for the first half of FY '26. Group revenue for the half was $82 million, down 9.5% on the prior period. This reflects a combination of softer retail demand in the Americas, a more disciplined retailer inventory fulfillment approach and mixed seasonal conditions across our regions. Earnings before interest, tax, depreciation and amortization was $5.3 million, which was ahead of our guidance of $4 million and marginally lower than the prior period. Despite the impact of lower revenue in the period, this outcome reflects tighter cost control across the group, the absence of prior year D365 implementation costs and the early benefits from the reset of our U.S. operating model. Net loss after tax was $3.3 million. It is important to note, though, that $1.6 million of this relates to the nonrecognition of U.S. tax losses as a deferred tax asset rather than underlying trading performance. From a cash perspective, the first half was a clear step forward. Net cash from operating activities was $15.1 million, driven by disciplined inventory management and improved working capital outcomes, particularly in the Americas, where retailer inventory positions were more tightly managed compared to the prior period. As a result, the group moved to a net cash position of $1.9 million at the half compared to a net debt of $8.9 million at the end of half 1 FY '25. This improvement reflects deliberate management action rather than simply a change in market conditions. So turning now to our performance by region, where trading conditions and outcomes varied meaningfully across the group. So starting first with Australia and New Zealand. Grain storage fabric volumes exceeded our expectations, although they were lower than the prior year, which benefited from an unusually strong replenishment cycle. Customer demand remains solid with share that was gained in the prior period maintained throughout this harvest season. In retail, Bunnings revenue was modestly lower than the prior year, driven by unfavorable weather conditions in December, which impacted peak seasonal sell-through. But despite these mixed conditions, margin improvement and disciplined cost control supported profitability across the region. And a further positive during the half was the securing of a long-term contract manufacturing agreement with a major commercial customer, which will help improve earnings stability in our home market. So turning now to the Americas. As expected, retail conditions remain challenging through the first half with soft consumer demand continuing to pressure revenue. In contrast to the prior year, we intentionally avoided inflated inventory fulfillment into retail channels that occurred in the prior period. And this disciplined action was designed to reduce retailer overstocks, limit retailer discounting and support more sustainable replenishment as we enter the second half peak trading period. Now while this affected reported revenue, it also contributed to improved working capital outcomes and cash generation. Our commercial business, though, in the Americas remained resilient despite elevated project cost pressures across related construction inputs. And importantly, early benefits from the reset of our U.S. operating model are beginning to flow through. Now while these are not yet fully evident in reported earnings, the simplification of our structure and reduction in overheads will position the business for improved performance as conditions stabilize. Across developing markets, results were mixed during the half. Middle East growth was softer than expected as regional instability started to delay project activity and weigh on customer confidence. In contrast, though, Europe delivered revenue growth despite lower demand in Israel, supported by stronger activity in our core markets of Spain and Italy. Throughout the first half, we also invested selectively in future growth opportunities. Category expansion trials are underway in the water containment and horticulture segments in the UAE and new sales capability has been established in Thailand to support long-term market development in Southeast Asia. These actions are targeted and consistent with our broader revenue diversification strategy. Corporate costs reduced by $2.4 million compared to the prior period, reflecting the absence of nonrecurring D365 costs and the ongoing benefits of a simpler operating model. Foreign exchange movements during the half were largely the noncash revaluation impacts of volatility between the U.S. dollar and the Chinese yuan. So in summary, despite varying regional at that conditions, the first half highlights stronger operational discipline, improved cash outcomes and the early impacts of the structural changes underway across the business. So turning now to our priorities for the second half and also our outlook. As we move into half 2, our focus is clear and execution driven. In North America, our priority is to maximize the peak retail summer trading season. While consumer demand remains uncertain, our objective is to optimize sell-through, protect margin and to ensure the business is positioned to benefit from replenishment as the season progresses. Right across the group, we are continuing to build on the efficiency gains already achieved by further simplifying the operating model and removing duplication and waste. Now this next phase of work is focused on sharpening decision-making, reducing complexity and delivering additional sustainable cost benefits. Manufacturing diversification remains a critical priority. We will continue to progress this program while optimizing the China manufacturing cost base. Now this dual focus reduces risks, improves resilience and supports margin improvement in a volatile global trade environment. And the progress that we've made to date gives us confidence in the direction and pace of this work. And alongside of all of this, we're ramping up a set of targeted growth initiatives across priority consumer and commercial segments that's aligned to our strategic direction. These actions are built around what we already do well and where we have established customer access, supporting more resilient and sustainable future earnings. Now shifting to our outlook. Australian retail trading is finishing the summer strongly with sell-through at Bunnings in January reaching record levels. In the United States, we remain realistic in our planning. Trading conditions are expected to remain challenging with ongoing certainty around tariffs and consumer behavior expected to persist through the peak season. Across developing markets, that regional instability in the Middle East is expected to continue influencing customer confidence and project timing. Importantly, though, the cost benefits from the U.S. operating model reset already implemented will increasingly be reflected in the second half. Early engagement, though, with our customers around the globe in response to these targeted growth initiatives has been very encouraging. Contribution will develop over time but we are seeing the foundations for momentum to build steadily into FY '27. And finally, given the current uncertainty in the U.S. retail environment, we do believe it's appropriate to refrain from issuing full year FY '26 performance guidance at this stage. So in closing, the first half demonstrates that our operating discipline and cash focus are delivering tangible outcomes. We've strengthened the balance sheet and simplified the operating model despite uneven market conditions. Across the group, we're making deliberate progress in lifting productivity and agility with a sharper focus on cost control, execution and working capital discipline. These structural actions are strengthening the business and improving our ability to respond as market conditions change. In the United States, while near-term market conditions do remain challenging, our core customers remain actively engaged. They continue to value GALE's product performance, reliability and partnership approach, reinforcing our relevance and positioning us well as we work through this cycle. Our strategy is clear, aligned and being executed right across the organization. We're focused on value-led growth and disciplined investment using a technical capability and customer relationships to build a more sustainable earnings profile over time. Finally, our entire GALE Pacific team are aligned, committed and accountable for executing our strategy and delivering improved returns to shareholders. So thank you for joining us at today's briefing and for your continued support of GALE Pacific. And Dexter and I are now happy to answer any questions that you may have. Have a look at the question?

Yes. So there's a couple that have come through, Troy. The first one is, what do the recent announcements in the U.S. regarding tariffs mean for Gale?

Yes. So we've been used to lots of volatility as it relates to tariff over the journey and the last, I think, 72 hours has proven that as well. So what it means is that the situation is still largely fluid. We have seen the Supreme Court removed the 20% tariff and now have imposed a 10% tariff. So that's the current state for that. When we think about from an industry point of view and what it means for us, naturally, it's all still fairly fresh. What we do know, though, is that as we build inventory coming into a peak North American trading season and we think about the complexities around Chinese New Year, we do have inventory on the ground already in Fontana and also with our customers as well that has already incurred the higher rate of tariffs. So on the surface, it seems positive. But naturally, we need to see how that's going to model out as we progress through the peak period.

Yes. And we're certainly not banking on any refunds many times.

No, no. I don't think -- I mean, FedEx have just issued suits today. So all of that process is starting. It's still too early to see how that's going to impact us.

Yes. Okay. We have another question, which is the U.S. revenue drop is quite significant. Does this indicate a bigger problem?

So I think in considering that question, if you look at the revenue shortfall and the revenue decline in the first half, there's really sort of 2 factors, I think, we need to consider there when answering that question. The first one is that there is softer retail demand, and we've seen that through the back end of the peak trading period as consumer confidence was quite low. But then there was also this deliberate action that we took not to early fulfill inventory and put additional inventory into our retailers that occurred in that second half -- at the back end of the first half. So if we consider the entirety, I guess, of the U.S. or the Americas revenue decline in the first half, I think that inventory fulfillment piece is around 2/3 of that total number, meaning that 1/3 of that is because of softer volume. I think the important thing to note there is that there's a couple of things for our retailers. One is that they're supportive of what we're doing around manufacturing diversification. And importantly, they're supportive of the time lines that we have as well. These things do take some time. But the second thing is that they're still committed and working with us in partnership throughout this period of time as well. So that gives me great comfort that our solid core business is still strong, plus the initiatives that we have underway are being positively received by some of our customers as they look for ways to grow their business. So naturally, we can't control what we can't control, but we're focusing what we can to be able to provide revenue and volume growth as we traverse a very challenging consumer environment.

So there's a question here. Can you grow the commercial business in the U.S.?

The short answer to that question is yes. Yes, the commercial business is a significant part of our Australian business, and it's a significant part of our U.S. business, and we've had 3 consecutive years of revenue growth, but we are only operating in one segment. And so where we see growth in the commercial segment in the United States is not only growing the existing architectural shade business, but also extending that into areas and replicating areas in Australia in America, where we're strong in Australia. So things like horticulture is really important, looking at agriculture as well. And so we're making some targeted investments and diverting some resource from other areas of our business to make those investments in the second half to grow not only commercial -- our commercial share in the United States, but also right around the group. We know that, that platform is all coming out of our facility in China. We make good margin on that product. And so -- and we know it delivers value for customers in Australia. So it's finding areas around the world where that value is relevant, where we can replicate that. So yes, absolutely.

And it looks like there's one final question, which is perhaps a bit of a follow-on from there. Just simply, where will the growth come from?

Yes. So I think that now that we've got a really clear defined strategic direction around what this business has been built on over the past 75 years, which is shade, that gives us a great platform to build from. And I think the simplest way to answer that is our ambition is to replicate the category depth and breadth of our more mature Australian market across consumer and across commercial and across product categories in our existing core markets, I think about the United States. And if we can do that and have that category depth of Bunnings, in stores like Lowe's and Home Depot that have 10x the store count, that's certainly a pathway to growth. Also, likewise, in our developing markets as well where our horticulture and agriculture products have relevance and some of those market trials that we have at the moment are leading towards that. So that's where we're choosing to grow. And then looking at climate appropriate areas like India, like in Southeast Asia as well, where we can move into those adjacencies and into those existing markets. So it's through what has got us here and the value and the growth that we're delivering in our core markets and expanding that as much as what we can. And so that's our ultimate growth strategy.

Okay. It doesn't appear there are any more questions, John?

No questions. Excellent. Okay. Well, again, thank you for attending today's briefing. If you do have any other questions, you're more than welcome to reach out via the Investor Relations e-mail address, which is on our corporate website at galepacific.com, but also reaching out to Keys Thomas Associates, who are our Investor Relations partner as well, and where Dexter and I are very, very happy to answer any questions or have any discussions that you want to have. So with that, thank you for your attendance, and we'll talk to you again soon. Thank you.