Andrew Musgrave

Welcome to another episode of ASX Briefs, and joining me today is Troy Mortleman, the CEO of GALE Pacific Limited, which is a global manufacturer and distributor of innovative high performance shade fabrics. Troy, great to have you with me today and welcome to the ASX Briefs podcast.

Troy Mortleman

Thanks, Andrew. Good to be with you.

Andrew Musgrave

Now, Troy, to kick things off for listeners that are new to the GALE Pacific story, can you just provide a brief overview of the company?

Troy Mortleman

Yes, certainly. So, look, GALE Pacific is a global manufacturer of technical fabrics, and we're a provider of shade solutions, and we serve a number of markets. We serve consumer, commercial, and industrial markets. And this year we're celebrating our 75th anniversary. We service over 40 countries around the world through operations in Australia and New Zealand, in the United States and Dubai, and we've got salespeople dotted around Europe, India, and in Southeast Asia. We have two brands. Our Coolaroo brand services our consumer shade market, where we have our products ranged in home improvement retailers all over the world, predominantly Bunnings, Lowe's, the Home Depot are names that investors may know. And our commercial fabrics are used in hardcore industrial applications for agriculture, for horticulture, for architectural shade, water containment, and those things as well. We're vertically manufactured or vertically integrated manufacturing, both up in China and also here in Australia as well. So, we're proud to be an Australian manufacturer.

Andrew Musgrave

Touching now on your recent results, revenue fell 9.6% to $155.5 million, yet EBITDA actually rose 2.5% to $12.3 million, and margin expanded to 7.9%. Walk us through how you grew earnings on a smaller revenue base.

Troy Mortleman

Yeah, so it was a really a couple of different things. It was certainly through better product and customer mix throughout the organization, but really it was all about tighter cost control and simplifying the way that we operated. So particularly, you know, we reduced operating expenses by over $7 million right across the group, which included that resetting, I guess, of the Americas business as well and so that's really the core part of it. Our customer and product mix are just through better earnings quality and selling more high margin products to different customers, which helped us. So, but importantly, you know, that that operating cost reduction, we didn't impact any revenue or customer generating or customer-focused functions within the business as well.

Andrew Musgrave

You've also described FY26 as a year of meaningful change where profitability remained below expectations. So, what's the realistic scorecard on the year?

Troy Mortleman

Look, I think it was a mixed result. I mean, certainly we didn't deliver the revenue or the profitability that the business can deliver, and certainly what we expect, and we still delivered that net loss of 2.9. But certainly, what we did do is we really materially strengthened the business. I think you know, better cash flow, reducing inventory, reducing costs, and particularly moving back into a net cash position. So those things were you know very, very positive for us, and now our focus now turns to growth and then you know getting this business back to profitability.

Andrew Musgrave

Touching now on the balance sheet, operating cash flow swung from just $0.1 million to $21.4 million. And the balance sheet moved from $8.9 million net debt to $4.9 million net cash, a $13.8 million turnaround. What were one or two of the biggest levers behind that?

Troy Mortleman

It really was about working capital. Disciplined working capital management, particularly inventory. So, we place a really strong emphasis on turning those earnings into cash by controlling your inventory. We reduced inventory by $8.6 million throughout the year, predominantly upstream in our manufacturing facilities that naturally flowed down into our operating regions and just operating with the right amount of inventory at the right time. So, despite that, though, we didn't reduce our service level to our customers. And so that certainly helped us. But that was the biggest driver, I think, on that $21.4 million operating cash flow swing.

Andrew Musgrave

You mentioned operating expenses were cut by $7.2 million. How much of that is structural and permanent versus one-off savings that could creep back into the business?

Troy Mortleman
 
 

Well, the meaningful part of it is certainly structural. And I spoke about the America's operating model reset, and that delivered you know almost half of that for us. And so that'll be ongoing. We, also you know focused on right across the group removing duplication where we could find it, but then also reducing our reliance on third-party IT companies to manage our D365 operating system throughout the business as well. So, you know, we will continue to look for ways where we can still remove duplication and waste across the group and reduce costs even further, but we're also going to make you know some selective investments to make sure that we can keep focused on growth and drive that demand generation through the business as well.

Andrew Musgrave

Moving now to the US, the America's revenue was down 15% and EBITDA down 11% with US retail demand soft through the peak season. How much of that is the consumer environment versus deliberate inventory realignment on your side?

Troy Mortleman

Yeah, look, it is a bit of both. Certainly, in the first half it was all about that inventory realignment and how we fulfilled inventory coming into our retailers to service the peak season. So, we took some deliberate actions there to make sure that we didn't overload retailers coming into that season. And that helped us with customer relationships as we went through into the peak season. But certainly, consumer demand in the US was soft. Season started encouragingly, but certainly as the season started to progress towards May and June, it did start to soften there, alongside of lots of other consumer categories in the Americas as well.

Andrew Musgrave

You've also signed new retail agreements with Menards, Do It Best, and Orgill, and US e-commerce sales nearly doubled. How quickly can those new partnerships translate into revenue growth in FY27?

Troy Mortleman

Yeah, we're really pleased to be able to expand our distribution reach in America, and that gives us the opportunity for 12 to 13,000 retail outlets right across the country. These things take a little bit of time in the US as the season goes through, and also as categories need to be reset and ranging needs to be looked at. But certainly, you know we expect something to come flow through into 27 as we get into the peak trading period in calendar year 27. But we know we're really focused on that is longer-term structural improvement in terms of our distribution reach in in the United States.

Andrew Musgrave

Coming back now to Australia and New Zealand, ANZ revenue revenue dipped 4%, but EBITDA jumped 22% to 11.5 million with margin up to 15.1%. What's driving that margin expansion and is 15 plus margin sustainable for this region?

Troy Mortleman

So similar to what I spoke about before around customer and product mix, so we certainly had a better customer and product mix in the region in particular. But we were very, very tight on cost control as well. And so, that certainly helped us to drive those margins above 15%. Depending on what that structural revenue looks like throughout the region, it will depend on whether we can get to that 15% again. Certainly, we've got the ability to be able to do that, and that's what we're really focused on, is using the strengths of those of those retail and commercial partnerships to deliver stronger margins and make that you know more sustainable and to remove some of the cyclicality around some of the demand cycles that we face here.

Andrew Musgrave

And grain storage, fabric demand normalized of an exceptional FY25, but you say it's still above long-term averages. How should investors think about the underlying run rate for that category?

Troy Mortleman

Yeah, I think the thing to note with grain is that it's not pegged to harvest yields, it's pegged to usage cycles, and so that does vary depending on season to season. The important thing to note is that you know our share with end use customers like Grain Corp is has been maintained. I mean, we have a dominant share of that market. So, it will fluctuate depending on what their usage cycles are. But I mean, importantly for us, we look at the share and so whilst we've got that dominant share and that's not shifting, we know that we're going to be able to pick up some nice business there and some long, long-standing business there that we have with that customer.

Andrew Musgrave

Now turning to developing markets where revenue fell 12% and EBITDA fell 41%, largely due to the Middle East conflict halting orders for six weeks. How exposed does that region remain to further geopolitical disruption?

Troy Mortleman

Look, it does. I mean, and we're certainly not walking away from that, and we've been quite open around the risk that that does provide. But I think what it does do, that it shows us the value of having established operations in Dubai, particularly over the last 20 years, having an established team, but more importantly, having inventory on the ground. And that certainly helped us to be able to service that market, not only you know as the conflict started to abate, but now coming out of that piece out of that time as well. That we're in much better position than a lot of our competitors who are bringing product in offshore. We've got that team on the ground, and that's helping us to be able to withstand that. But we do acknowledge that you know there is going to be some volatility there, but we think we're better placed to be able to manage it.

Andrew Musgrave

And with the inventory in Dubai, has that experience changed how you manage risk in that market going forward?

Troy Mortleman

Not really. I think it's reinforced the model that we've got. you know, and I think having that inventory there has certainly been advantageous for us. You know, we've we have maintained that very strong credit discipline and receivables management that we've been able to have over the last couple of years. And so, we'll continue that and so as long as we can manage that piece, manage the payment terms and manage that credit risk, and then manage the flow of inventory coming through as well. We think then that we can mitigate some of those risks. We can't mitigate the demand cycle and things that are happening externally. But what we're in control of, we certainly think that we're on the right path there.

Andrew Musgrave

Finally, Europe grew on a hot summer and you're building momentum in Asia and India. How meaningful can these newer markets become for the group over the next few years?

Troy Mortleman

Yeah, certainly I think you know both of those markets show a lot of promise, particularly as we expand our commercial parts of our business into other areas outside of our core architectural shade categories, particularly horticulture, is where we're making some inroads in markets like India and certainly within that growing middle class that's in India as well, architectural shade becomes more important in that market as well. Europe's only getting hotter, and so it's a core market for us to be able to expand and we'll do it selectively and we'll do it carefully over the coming years to make sure that we do it in a measured way.

Andrew Musgrave

From a strategic perspective, you're shifting manufacturing capability from China to Thailand and consolidating the warehouse footprint. What's the timeline and expected financial benefit of that transition?

Troy Mortleman

Yeah, well, in terms of manufacturing, I guess I'd probably characterize it as a diversification of manufacturing as opposed to shifting. You know, we're still very committed to our manufacturing footprint in China, but we need recognize the need that we do need to diversify that. And so, we're electing to do that with a trusted partner in Thailand, particularly on a one product category, which is our outdoor roller shade category, which is the largest export product that we have into the United States. And so, you know, we've been able to successfully trial some fabric production there, and we're hoping to be able to get some low-scale commercial production going in FY27. So that will happen over time. In terms of consolidating warehouse footprints, I mean, those things are happening up in China to make sure that we, you know, again, with the reduction in inventory, we need less storage space. And so those things do deliver some cost savings for us. Again, we'll continue to look for those things where we can, and we'll do that progressively throughout 27 and into 28 as well. But manufacturing diversification is certainly a longer-term ambition for us.

Andrew Musgrave

Okay, Troy, now just to wrap things up, what are some of the key milestone’s investors should keep an eye out for over the next 12 to 18 months?

Troy Mortleman

Yeah, look, I think it's about that continuation of that good, strong cash generation. I mean, that's certainly what we're focused on, you know, tight cost discipline as well. But really, it's all about growth for us and looking for the opportunities where we can materially grow our share and grow the categories participation that we play in right across the group. That's certainly what we're focused on, and that's what we will be looking to report to shareholders in the reporting periods to come.

Andrew Musgrave

Okay, Troy. Well, it's been great to have you on the podcast today to get an update on where the companies at. So, we appreciate your time and look forward to further updates in the upcoming months.

Troy Mortleman

Great. Thanks, Andrew. Thanks for having us.

Andrew Musgrave

That concludes this episode of ASX Briefs. Don't forget to subscribe, and we look forward to catching you on our next episode.