GALE PACIFIC LIMITED — Management Reports 2005

Sep 11, 2005

Attention ASX Company Announcements Platform Lodgement of Open Briefing^®

Gale Pacific Limited 145 Woodlands Drive Braeside, Victoria 3195

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Date of lodgement: 12-Sep-2005

Title: Open Briefing^®. Gale Pacific. MD on FY05 Results & Outlook

Record of interview:

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Gale Pacific Limited has reported a profit after tax of \$4.7 million for the year ended June 2005 compared with \$7 million in FY04 on revenue growth of 40 percent to \$149 million. Group EBITDA margin of 11.3 percent in FY05 was down from 15.8 percent in FY04. Can you explain the main factors behind the downturn?

MD & CEO Gary Gale

A range of factors depressed margins in FY05 both in Australia and overseas. We had a dramatic and rapid increase in raw material costs, notably metal and plastics, which we had to absorb for some months until we could implement price increases. Softening in the Australian D.I.Y. market led retailers to run down inventory and the drought affected demand for agricultural products.

There were costs relating to restructuring and growth. Substantially higher overheads were required while we were building the expanded facility in China and establishing the Gale Europe operations. Profit was also affected by consolidation in the December half of the anticipated loss of our European subsidiary Jung which was not incorporated in the FY04 first half as we purchased it in the previous June half.

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What action did management take to address the downturn and what impact did it have on this year's result?

MD & CEO Gary Gale

We passed on the increases in raw material costs in prices by year end and we substantially reduced overheads during the period as the management teams became operational in China and Europe.

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To what extent will costs reduce and what other benefits will flow, as a result of recent capital expenditure in China and the transfer of plant to China?

MD & CEO Gary Gale

With the recent establishment of the new extrusion and knitting facilities in China and the transfer of equipment from our Australian Braeside plant to China in the current half year, we expect substantial operating savings to flow from the completion of the plant installation.

Our facility in China has adequate capacity to meet our expected growth in sales volume in the northern hemisphere, which we expect to account for 70 percent of sales of consumer products within three years. By reducing our supply time by up to eight weeks we'll be better able to compete with our northern hemisphere based competitors.

This week we exhibited at the SPOGA show in Cologne Germany, the most important show of the year for our European retail business. We introduced a significant range of new products and technologies recently developed by our new R&D team in Ningbo, China. We're pleased that these new products have been well received and have expanded our range carried by existing retail customers and attracted new business with a variety of D.I.Y retail groups in 11 European countries.

The revenue benefits of the expanded range will begin to be realised in the second half of FY06. We've written this new business because we can now satisfy the lead time requirements of these markets.

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In FY05, net debt increased 147 percent to \$79 million. Since the end of June you've raised \$9 million in convertible notes. What is your gearing policy and what level of debt are you targeting for June 2006?

MD & CEO Garv Gale

While our gearing was quite high at year end, it reflected the need for our China capital expenditure program for a significant inventory build up to insure against a shortfall from any interruption to production during the transfer of plant in China. As that inventory is sold down we'll progressively reduce our gearing.

Our policy and our intention are to significantly reduce our level of debt. We expect to reduce the net debt significantly over the next 12-18 months.

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What is you strategic plan for each of the retail and commercial segments?

MD & CEO Gary Gale

The retail segment, which represents approximately 70 percent of our total business, will continue to expand and build upon the distribution bases established in the Australasia area with China's D.I.Y. market becoming a new area of opportunity for us over time.

In the USA, we've already put our foot in the door of most of the significant retail groups. Our strategy is to expand our volume in the US market by getting these retailers to carry our full ranges.

FY06 is our second year in Europe and we'll aim for geographic expansion and establishing relationships with the major retailers. Then we'll aim to have these retailers distribute our full range. As the European market is diverse, products must be customised for distribution to various regions. We're working hard with our R $\&$ D teams developing and testing adaptations of products to fully capitalise on the opportunities presented by these markets.

In the commercial sector, we have recently completed a European market study and will be aiming to develop the commercial business in FY07. Our commercial products are less seasonally biased to summer than our retail products.

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Who are your major retail customers?

MD & CEO Garv Gale

Our largest customers in Europe are Praktiker, Bauhaus, Globus and Hella. In Australasia, there's Bunnings. Mitre 10 and Danks and in the US there's Lowe's, Costco, Home Depot, and Sams/Walmart.

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In FY05, your revenue in Asia Pacific increased 24 percent to \$103 million and pretax profit decreased 18 percent to \$5.7 million, representing a decrease in pretax margin to 6 percent from 8 percent. Is there a risk that Asia Pacific margins will remain at these low levels given the weakening in retail spending and your reliance on the major retail homeware stores?

MD & CEO Gary Gale

Margins should significantly improve in the Asia Pacific region due to the price increases of October last year and February this year and there'll be a significant lowering of overheads. We've proven our ability to pass on costs with price increases. We anticipate, however, that Australian revenues will remain flat during this evelical tightening.

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What was the impact of the acquisition of Donaghys Industries of New Zealand on the Asia Pacific results?

MD & CEO Garv Gale

We completed the purchase mid-December 2004, and its customer base and product ranges have been successfully integrated into the group. Results are in line with expectations with revenue of A\$10 million for the six and a half months The acquisition has given us a low cost industrial plant of consolidation. specialising in technical fabrics in New Zealand and strengthened our position in the commercial, horticultural and industrial markets in Australia and New Zealand.

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In FY05 your revenue in Europe and the Middle East increased 110 percent to \$64 million and pretax profit fell 51 percent to \$1.5 million. Can you explain the impact of the Jung acquisition?

MD & CEO Gary Gale

The European results for FY05 were affected by the first year's establishment expenses and the costs associated with setting up Gale Europe.

Jung has been a success for us since we consolidated it in March 2004. Jung's FY05 margins and sales were both up on the previous year although a full year to vear comparison is difficult as we only acquired Jung in February 2004 and therefore have only the stronger second half with which to compare.

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What is your strategy for growth in the European market?

MD & CEO Garv Gale

Our strategy this year is to expand our business geographically from central Europe into the UK and the Mediterranean, where our most important targets are France, Spain and Italy. We're expanding the range of products being sold to existing customers and we're initiating new business with a variety of new D.I.Y. retailers in those countries and also Belgium, The Netherlands, Ireland, Germany, Iceland, Austria and Switzerland.

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In FY05, your revenue in the Americas decreased three percent to A\$15.4 million and there was a pretax loss of \$1.08 million. What is the outlook for this business?

MD & CEO Gary Gale

Late in the year, we succeeded in expanding the number of major retail stores stocking our standard window shades, in addition to a significant increase in stores carrying the custom shade program.

With Peter McDonald, Chief Operating Officer, assuming the position of Managing Director, U.S. Operations later this year we expect to be able accelerate the benefits of our new. lower cost manufacturing platform, shorter lead times, and expanded capabilities to drive Gale's market expansion throughout the Americas. Peter will focus on building the existing diversified base of retail and commercial customers, and will also seek additional growth opportunities in those markets, including Central and South America.

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Your revenue mix in FY05 was 36 percent in the first half and 64 percent in the second half and the profit mix was four percent in the first half and 96 percent in the second half. How will the seasonal contribution vary going forward?

MD & CEO Gary Gale

Our revenue mix will remain biased to our second half over the ensuing years as our northern hemisphere sales accelerate. This year the second half profit bias will be exaggerated by approximately \$2.3 million in one time costs of equipment transfer to China to be absorbed in the first half.

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What are your priorities for FY06?

MD & CEO Gary Gale

Firstly, we'll focus on completing the transition of extrusion and knitting plants to China smoothly. Sufficient plant will be maintained in Melbourne as backup until the transfer to China is completed by the end of December.

With the establishment of our European and China operations now almost complete. FY06 is considerably different from FY05 for us and we'll be focusing on reaping the benefits of the investment in these operations. We'll continue to build on the success of the launch of our new products in our new European customer base. R&D will be a focus as we continue to introduce world leading technologies and product categories within our area of expertise into all our markets.

We will also be focusing on re-establishing momentum in the Americas. Peter McDonald's move to the U.S. later this year will drive this.

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Thank you, Gary.

For more information about Gale Pacific Limited please contact the Managing Director & CEO, Mr Gary Gale, on (03) 9518 3312.

For previous Open Briefings with Gale Pacific, or to receive future Open Briefings by email, visit www.corporatefile.com.au

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