Gale Pacific proves a force, come rain or shine
GALE Pacific chief Peter McDonald's next quest is to sell ice to the Eskimos after shipping 4000 rolls of waterproof shade cloth to the United Arab Emirates and Saudi Arabia, "a market where it doesn't rain".
The former marketer says that on the blue-moon occasions when it does rain, the clouds of dust mean it's dirty stuff, so if the petrodollar-rich kingdoms can afford the premium stuff, then why not?
The Middle Eastern foray is one example of how the once family-run, Melbourne-based manufacturer has broadened its remit from commodity shade materials, used as architectural fabrics and other applications such as grain covers.
McDonald expects Gale, which turned over $120 million last year, to double in size within three to five years -- and well beyond the limited parameters of its core domestic business.
In reality Gale hasn't quite taken the world by storm since its humble origins as a scarf and shawl maker in 1951. But the company -- now 27 per cent owned by the Pratt family's Thorney Investments -- has painstakingly built markets in Japan, South Africa, the United Arab Emirates and the US.
Gale's Coolaroo-branded items, such as shade sails, gazebos and market umbrellas, can be found on the shelves of major US retailers such as Costco, Sam's and Home Depot.
Quirkily, Gale is the country's biggest supplier of synthetic grass, sourcing the ersatz greenery from up to 20 offshore suppliers.
Gale's concurrent local move has been expanding into the retail home improvement sector, which allies the company with the Bunnings chain.
While the Wesfarmers hardware titan remains easily Gale's most important customer, Gale has also freelanced by acquiring the home-decorator-focused Zone Hardware (in 2011) and then speciality DIY supplier Highgrove (shower screens, splashbacks and the like) in late 2012.
For McDonald, the status quo was not an option when he took over from Gary Gale, scion of founder Harry, six years ago. At the time Gale was smarting under a $100m debt load, partly the result of a disastrous purchase of a German garden products supplier in 2004 which was divested at a loss in 2006.
With currency and cost pressures buffeting local manufacturing, a decade ago Gale transferred its knitted-fabric production to a new factory in the Chinese town of Ningbo, south of Shanghai.
Gale still runs a less labour-intensive coating operation in the Melbourne industrial enclave of Braeside, which is also the modest headquarters.
Despite the diversification, grain covers remain a staple business and orders will fluctuate with the weather. "At the moment we are loving the rain because all of the cockies are bullish," McDonald says.
A grain cover, which typically stretches to several hundred square metres, has to be replaced every two years. GrainCorp is a major customer and is watching any change in procurement procedures after Canadian group Archer Daniel Midland takes control of the grains handler.
McDonald is wisely circumspect about Gale's relationship with Bunnings -- easily Gale's biggest client -- which stocks Gale products in eight departments. Bunnings, he says, has been an excellent partner but he concedes that at times supplying retail giants can be a "tough gig".
Bunnings' "range reset" program 18 months ago saw all product lines put out to tender, resulting in competitive price tension and a tighter policy on inventory.
With Bunnings' up-and-coming rival Masters reportedly struggling for traction, Gale would appear to have its foot in the right camp. Still, complacency is never an option.
McDonald says as major retailers become more sophisticated, the investment required to maintain electronic commerce and efficient supply chains increases.
For instance, Gale spent $1m on an IT upgrade recently so it can continue to trade electronically and directly with the major retail outlets it supplies globally.
McDonald says the key to building Gale's core market is to convince users that Gale's technology-based offerings are worth paying for.
"We don't chase low-end segments," he says. "On a pound-for-pound basis our plant offers us good product at a competitive price.
"Part of our job is to convince people who tell the difference between the 43 herbs and spices that go into our product and compare that with what you get from a backyard Chinese operator."
Gale, in particular, is targeting the environmental pressure to replace PVC -- which is either burnt or goes to landfill -- with recyclable alternatives such as polyethylene.
"PVC is on the nose and is becoming increasingly on the nose, especially in Europe," he says.
McDonald cites as a growth area the coated fabric geo-membranes for lining tailings dams, which exposes Gale to the burgeoning shale gas sector.
The lower Australian dollar does have a positive for the stock, as Gale derives about $50m of US dollar-denominated sales annually from its offshore operations.
Chief financial officer Jeff Cox says Gale also buys a significant volume of US dollar-based products, so the drop in the local currency has forced out many of the instant importers, who materialised as fast as a taco van on a balmy summer's evening.
McDonald says most suppliers will be lining up "like in a Coles cafeteria" outside the big retailers, pleading for price increases to offset rising input costs and the significantly lower Aussie dollar. "They will be difficult meetings."
McDonald describes the US market as ticking along quite nicely, although demand is patchy. "It's a big market for us and a tough market," he says.
The retailers there prefer smaller bets when allocating shelf space.
"If your product doesn't sell, they will be banging on your door. But you only need a couple of hits over there to (increase) revenue pretty quickly."
McDonald says that with low debt of $5m and strong cashflow, Gale is hunting for more acquisitions, either here or in the US.
Gale's mating dances are at various stages of flirtation. "Some go hot and some go cold," he says.
"We are in constant dialogue both here and in the US."
With an $80m market cap, Gale's product presence is much better known than its corporate profile, with few brokers covering the stock.
RBS Morgans, one that does, expects an "upward re-rating" of Gale shares, as it integrates the recent acquisitions, improves offshore margins and shows more consistent profitability.
Gale generated a net profit of $8.5m in 2011-12 and first-half earnings of $4.5m.
RBS Morgans forecasts full-year net earnings of $9.2m on revenue of $121m and a full-year dividend of 2.5c (a 9 per cent yield).
McDonald says that while consumer confidence remains ragged, at least the agri sector is positive and the company now has the comfort of a geographic revenue spread.
0 comments:
Post a Comment