Gale Pacific Limited (GAP) Earnings Call Transcript & Summary

Good morning, and welcome to the GALE Pacific Limited FY '26 Results Briefing. Joining us today are GALE Pacific's CEO, Troy Mortleman; and CFO, Dexter Clarke. [Operator Instructions] It's my pleasure to hand over to GALE Pacific's Chief Executive Officer, Troy Mortleman.

Well, good morning, and thank you for joining us today at our full year results briefing for FY '26. My name is Troy Mortleman, CEO of GALE Pacific. And joining me today is our Chief Financial Officer, Dexter Clarke. This morning, I'll take you through our FY '26 results, discuss the performance of the group and our operating regions, outline the actions we've taken during the year to strengthen the business and explain how those actions are supporting our priorities as we move into FY '27. I'll also share our outlook and the areas where we remain focused on improving performance with a view towards restoring sustainable profitability. Following the presentation, Dexter and I will be happy to take your questions. So let's now begin with a quick overview of who we are at GALE Pacific. This year marks 75 years since GALE Pacific was founded in Melbourne. Today, we're a global manufacturer and marketer of technical fabrics and shade solutions serving consumer, commercial, industrial and agricultural markets. What differentiates us is the combination of strong brands, technical expertise, vertically integrated manufacturing and long-standing customer relationships. Our products are sold through leading retailers globally, while our commercial fabrics are specified across critical applications, including architectural shade, horticulture and water containment. Supporting these market positions is a global operating footprint spanning Australia, Asia, North America, Europe and the Middle East. We employ more than 400 people, serve customers in over 40 countries and operate manufacturing, distribution and commercial facilities across key markets. This footprint provides close control over quality, inventory and customer service while giving us the flexibility to respond to changing market conditions. As the pioneer of high-density polyethylene shade fabric and global market leader in that category, we have established positions across many of the world's largest shade markets. During FY '26, we refined and embedded a clearer strategic direction across the organization. Our purpose is to enrich lives through shade, while our vision is to make shade as fundamental to outdoor life as sunlight. Our strategy is built around 3 pillars: culture, innovation and growth. Together, these pillars guide how we allocate resources, innovate and pursue growth opportunities. We measure success in 3 ways: margin expansion, EBITDA growth and cash generation. The execution of this strategy is well underway, and it guides our actions across the business. So moving now on to our results from FY '26. FY '26 was a year of meaningful change. While profitability remained below our expectations, we materially strengthened the business through improved margins, stronger cash generation, lower inventory, a leaner operating model and a return to positive net cash position. Revenue for the year was $155.5 million, down 9.6% on FY '25, and I'll discuss the factors influencing this decline as I step through each of those regions. What I would highlight at a group level, though, is the improvement in earnings quality. Despite lower revenue, EBITDA increased 2.5% to $12.3 million and EBITDA margin expanded to 7.9%. This reflects a more favorable product and customer mix, improved cost discipline and the benefits of actions taken throughout the year to simplify and strengthen the business. Net loss after tax improved by $2.3 million to $2.9 million despite absorbing costs associated with the operating model reset and a $3 million foreign exchange expense that was largely noncash in nature. Cash generation, though, was the standout feature of the year. Operating cash flow increased from $0.1 million to $21.4 million, driven by disciplined working capital management and a material reduction in inventory. As a result, the group finished FY '26 with net cash of $4.9 million compared with net debt of $8.9 million a year earlier. This $13.8 million improvement in our balance sheet provides a much stronger financial position from which to execute our strategy and pursue both current and future growth opportunities. This result demonstrates that while there is still work to do ahead to restore profitability, the business exited FY '26 in a materially better financial position than it entered. Now what sits behind the FY '26 result are a series of deliberate actions taken throughout the year to improve operating performance and cash generation. The first was the simplification of our Americas operating model. During the year, we reduced organizational complexity, streamlined management and administrative layers and refocused the business on its core sales, marketing and distribution activities. These changes delivered $3.1 million in cash savings during FY '26 and established a leaner operating structure moving forward. Across the broader group, we maintained a disciplined approach to cost management. Overall group operating expenses reduced by $7.2 million as we removed duplication, improved efficiency and aligned our cost base more closely with current market conditions. Importantly, this reduction was achieved without materially impacting our core customer-facing or revenue-generating capabilities. The third initiative was our focus on working capital. Throughout the year, we placed a strong emphasis on converting earnings into cash through tighter inventory management and improved working capital efficiency. This reduced inventory by $8.6 million and was a key factor in strengthening the balance sheet and improving cash conversion. These actions were undertaken against the challenging operating backdrop. Consumer demand in the United States remained subdued. The conflict in the Middle East disrupted trading conditions and grain storage fabric volumes moderated from the exceptional levels achieved in FY '25. Despite these conditions, we remain focused on the factors within our control and acted decisively on cost, organizational complexity and working capital. So let's now look at our results by region and firstly, to the Americas. Revenue for the year was $64.3 million, down 15%, while EBITDA declined 11% to $13.1 million. Despite the lower revenue outcome, EBITDA margin improved to 20.4%, reflecting the benefits of the actions taken throughout the year to simplify the operating model. Trading conditions remained challenging throughout the year as softer consumer demand impacted the broader outdoor living category. During the year, we deliberately adopted a more disciplined approach to retail inventory fulfilment than in the prior year. And as a result, many customers worked through excess inventory carried into the season, reducing replenishment orders throughout the peak trading period. Now while this impacted revenue, it did improve cash generation and supported customer positioning. Encouragingly, though, our commercial business remained resilient despite the softer market backdrop. As we exited the year, we added business development capability in key U.S. markets to help accelerate growth in our existing architectural shade business while also supporting expansion into commercial segments where we have already established strong positions in Australia. We also continued executing against our growth priorities, securing new supply agreements with Menards, Do it Best and Orgill. Together, these partnerships significantly expand our market reach, providing access to thousands of additional retail locations across North America. Our own e-commerce platform also gained momentum during the year with sales nearly doubling from a developing base while providing an additional channel to engage directly with consumers. Now while consumer demand remains challenging, we've used this period to materially improve the Americas business. With a leaner cost base, healthier customer inventory positions, expanded sales capability and new customer partnerships now in place, the region is better positioned to deliver improved performance through the continued execution of our growth strategy. Turning now to Australia and New Zealand, our home market and the region where many of the capabilities and category positions we're now leveraging internationally were first established. Revenue for the year was $76.4 million, down 4%, while EBITDA increased 22% to $11.5 million. EBITDA margin expanded from 11.8% to 15.1%, delivering one of the strongest earnings performances across the group. This outcome reflects improved margin management, disciplined cost control and the strength of our positions across both retail and commercial channels. And while revenue was modestly lower than the prior year, it is important to note that FY '25 benefited from exceptionally strong grain storage fabric volumes. However, demand remained well above long-term averages during FY '26, supported by our long-standing relationship with GrainCorp and the leading position we've established in that category. Our retail business also continued to perform well. Core shade categories delivered growth, and we completed a successful trial of new gazebo products for Bunnings late in the summer season, creating the opportunity for further category expansion during FY '27. Encouragingly, our commercial business continued to build momentum. Architectural shade and water containment segments delivered growth during the year, supporting our decision to invest in additional business development capability as we look to expand customer acquisition. We also progressed several growth initiatives during the year. This includes renewing our long-term paper coating agreement with Visy, and progressing the rollout of our Solarweave horticulture hothouse fabric, which is designed to support entry into the large-scale commercial grower market. Overall, the ANZ region delivered a strong earnings outcome despite lower revenue. While it is our most mature market, further growth remains through category expansion, commercial segment development and deeper customer penetration. And this region also provides us with a proven model for scaling capabilities, categories and customer partnerships in much larger markets. So looking now to our developing markets region. Revenue for the year was $14.8 million, down 12%, while EBITDA declined 41% to $4.1 million. While the financial outcome was below the prior year, it is important to recognize the significant disruption experienced across the Middle East during the second half of FY '26. Prior to the escalation of the conflict, the Middle East business was performing strongly, delivering revenue growth of 7% during the first half. However, customer activity was materially impacted as conditions deteriorated throughout February and March. Pleasingly, demand progressively recovered from April onwards with revenue returning to prior year levels during the fourth quarter. Throughout this period, our first priority was the safety of our employees and their families. Importantly, our established presence in Dubai, including local inventory and experienced commercial teams on the ground provided a significant competitive advantage. While many competitors were impacted by imported supply disruptions, we remain well positioned to continue servicing customers, responding quickly as conditions improved and capturing new opportunities as demand returned. Disciplined credit and collections management was also maintained throughout the disruption, helping preserve cash, manage receivables and minimize the financial risk across the region. Outside the Middle East, Europe delivered growth through a really strong seasonal demand, while momentum continued to build across Asia. During the year, we also strengthened our business development capability in India, which has helped drive the rollout of Solarweave horticulture fabric trials with local customers. These trials leverage capabilities developed in Australia and support expansion into new commercial market segments. So while the Middle East conflict weighed on the FY '26 result, we remain encouraged by the opportunities right across our developing markets. Customer relationships remain strong, activity improved as conditions stabilized and our investments in local capability and market development continue to create new avenues for growth across both existing and emerging markets. Across our operations, the focus during FY '26 was improving efficiency, increasing flexibility and reducing supply chain risk. In China, we progressed a number of initiatives aimed at improving productivity and reducing complexity, including warehouse consolidation and manufacturing optimization projects. We also continued our work to standardize warehousing and logistics processes right across the group. This is an important step to both strengthening inventory management and creating greater consistency right across global operations. A key strategic priority during the year was manufacturing diversification. We successfully completed fabric trials in Thailand for roller shade products, which represent our largest export category into the United States and progress planning for low-volume commercial production during FY '27. This is also an important milestone as we continue building additional manufacturing flexibility, strengthening supply chain resilience and reducing concentration risk within our production footprint. So as we move through FY '27, our priorities are well defined. During FY '26, we materially improved cash generation, strengthened the balance sheet and established a leaner operating model. With these foundations now in place, our focus in FY '27 shifts firmly to executing the market expansion, customer acquisition and demand generation priorities embedded within our strategy. Our first priority is to accelerate commercial segment growth. We've expanded business development capability across all regions and are increasing customer acquisition activity across priority segments where our technical expertise, product performance and established market positions provide a clear advantage. Second, we're focused on scaling our U.S. consumer business by replicating the category breadth and depth we have successfully developed with Bunnings. We already have established retail partnerships across the footprint approximately 10x larger than Australia, providing a significant opportunity to expand category participation and increase customer value over time. Third, we're scaling demand generation across every region and across both our consumer and commercial channels. Through deeper end user insight, stronger digital capability and targeted market activation, we'll increase brand and solution preference, accelerate sell-through and specification and bring new end users into our category. Our fourth priority is continued operational optimization. We'll progress manufacturing diversification, improve productivity and standardize supply chain and distribution processes to support margin improvement, working capital efficiency and strong cash generation, all while increasing the scalability of the business. Turning to the outlook. We remain realistic about the external environment. Consumer confidence in the United States remains subdued and is expected to continue weighing on discretionary spending. Demand across the Middle East is likely to remain sensitive to geopolitical developments, while Australia summer trading may actually benefit from the hotter and dry conditions associated with the forecast El Nino weather pattern. Now these factors create both risks and opportunities, but our approach will remain disciplined. We'll continue prioritizing profitable, cash-generative growth while maintaining the operational and financial discipline established during FY '26, and we'll provide a further performance update at our Annual General Meeting in November. So in closing, I want to reinforce 5 key messages. The first is that while the work undertaken during the year has materially strengthened the business, profitability remains below where we expect it to be. There is more work to do, but restoring sustainable profitability remains our primary objective. FY '26 was a year of meaningful change, delivering material improvement in cash generation, operating efficiency and balance sheet strength. The actions taken during the year were deliberate and focused on the factors within our control. Those actions improved the quality of the business despite challenging market conditions across our regions. The growth elements of our strategy are now being actively executed. Commercial expansion, U.S. consumer category development, demand generation and operational optimization now define our execution priorities. And finally, we enter FY '27 with greater financial flexibility, a clear strategic focus and a business that is better positioned than it was 12 months ago. Our task now is clear to build on the progress delivered during FY '26, translate our strategic priorities into improved performance and deliver sustainable profitability and improved returns for shareholders. We're confident in the direction we've set. We're disciplined in our approach, and we're focused on execution. So thank you for joining us for today's briefing and for your continued support of GALE Pacific. Dexter and I would now be pleased to answer any questions that you may have. Have a look at the questions.

So the question is how and where will revenue growth be delivered? And what is a reasonable rate of growth to aim for in FY '27 and beyond?

So really, it's across all of those strategic growth priorities really, but I mean it's across those 4 things. I mean we're really focused on demand generation and scaling what we're doing in the United States. And that work is already underway. Our commercial part of that business provides the clearest long-term -- near-term opportunity for growth. We know we operate in longer buying cycles, particularly in our retail environment in the United States, and we're working on actively growing that. So that's really where we're focusing on that. And from a rate of growth, again, we're realistic about what those things might look like. And so we'll have more to say on that from a progress point of view, I think, when we get to the AGM.

Okay. There's one more question here at the moment, which is, has the change of approach to inventory stocking in the U.S. fully washed through the revenue numbers?

Yes. It's a good question because that certainly did impact some of the revenue numbers in the United States as they went through their peak season, which they're now on the way out of that. So the demand profile naturally in the U.S. was a little bit softer, but they did successfully -- these retailers at least start to sell through some of that inventory over this summer. So -- by the time we get into a build for next year, we expect that, that impact will be lessened certainly. But what we're really focusing on is adding to that and increasing our scale and increasing that category, depth and breadth that I spoke about to try and grow on that and grow our presence there in the United States. New retailers will be able to help us, be able to do that and to be able to soften some of the impacts of any residual inventory that might be left over in some of these retailers.

So the next question is, will we speak to the most recent demand characteristics?

So yes, we'll talk to that, I think, in more detail when we get to the AGM in November. We'll certainly talk about how the early part of this year has gone. Actually, it -- we're only sort of 6 or 7 weeks in. So I think we'll have more to say on that in November.

And at the moment, the final question is, have input costs stabilized?