GLOBE INTERNATIONAL LIMITED — Management Reports 2004

Aug 25, 2004

Attention ASX Company Announcements Platform Lodgement of Open Briefing

Globe International Limited 300 Lorimer Street Port Melbourne, VIC 3207

Date of lodgement: 26-Aug-2004

Title: Open Briefing. Globe International. CEO on Turnaround

Record of interview:

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Globe International Limited yesterday reported net profit of \$7.1 million for the year ended June 2004 compared with a loss of \$59.7 million in the previous year. Normalised net profit, excluding amortisation of intangibles, was \$11.4 million compared with a loss of \$4.0 million. What were the main drivers of the turnaround and is it sustainable?

CEO Michael Sonand

The turnaround was due to two key factors. First, over the last 12 to 18 months we put a lot of effort into getting our house in order, particularly better managing our cost base, reducing working capital and improving management reporting systems. These efforts took place across the group, but particularly focused on North America.

Second, we've worked to create a solid platform for future growth in the marketplace through focusing on innovative and relevant product and aggressive marketing. That began to have a clearer impact in the second half of the financial year, with momentum continuing in the current year.

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What earnings guidance can you provide for the current year ending June 2005?

We're forecasting an improvement in sales over 2004, and we expect to exceed the sales record of \$217 million we achieved in 2002.

We don't provide definitive earnings guidance, but we'll continue to keep the market informed of our strategic direction and the trend in profitability.

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What are your expectations for growth over the next few years?

CEO Michael Sonand

We operate multi-brands in multi-regions, each at different stages of development. We see many opportunities to grow aggressively across all the regions where we operate, particularly by expanding the apparel category in both North America and Europe.

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In 2004, EBITDA from Globe's biggest market, Australasia was \$12.8 million, almost double the previous year's \$6.6 million. EBITDA margin improved to 12.5 percent from 7.2 percent. To what extent did the profit improvement reflect the benefits of a stronger Australian dollar and to what extent cost containment initiatives?

CEO Michael Sonand

There's no doubt the stronger Australian dollar helped margins, but the main driver of our earnings growth was the increase in sales volume. Our costs are fairly fixed and a considerable proportion of the additional gross margin from sales flowed to the bottom line.

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Sales in Australasia grew 12 percent to \$102.6 million, although growth slowed in the second half to 5 percent. Is your Australasian market mature? How can you drive further sales and earnings growth in this market?

CEO Michael Sonand

We're very pleased with our result in the Australasian market. Although Australia's the market we've operated in the longest, there are still lots of exciting opportunities for growth. It's important to remember we operate the most brands in this market. That gives us enormous scope to manage a far more targeted distribution policy and simultaneously manage distinctive brand strategies in a number of segments and product categories. We expect to see good growth in Australasia for some time to come.

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What was the contribution to the Australasian result of new products in the surf market? What's the expected contribution going forward?

Our Globe and Gallaz footwear and some of our apparel brands already have strong representation and brand performance in the surf distribution channel. The Globe surf apparel category has only just been launched from its base in Torquay, so it had no contribution to the 2004 result. Nevertheless, forward orders are in line with expectations and we're very confident it's going to rapidly become an apparel brand of some significance for us both here and overseas.

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The North American business booked EBITDA of \$1.3 million in 2004 compared with a loss of \$12.8 million previously. The business had a break-even result in the first half, with the \$0.5 million loss made by the Dwindle brands, formerly Kubic, offset by a \$0.4 million profit in the Globe North America business. What were the relative contributions of Globe North America and Dwindle to the fullvear EBITDA result?

CEO Michael Sonand

The Dwindle brands made a slight loss and most of the positive contribution came from Globe North America footwear. But what we're focused on is the future potential of each of the divisions and we'll be seeing positive sales growth and profit contributions by both in the coming year. This is already being seen in early trade.

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Globe North America booked sales of \$32.3 million, up 6 percent. Sales were up 51 percent in the second half compared with the first half after three consecutive half-years of decline. What were the drivers of the second-half growth and what's the outlook for the current year?

CEO Michael Sonand

The second-half increase was subdued by the translation impact of the stronger Australian dollar. In US dollar terms, second-half sales were 60 percent up on the first half. The dramatic turnaround came primarily from internal strategies and initiatives our North American management team pursued and it's clear Globe's rapidly regaining wide acceptance in the market.

We'll remain aggressive in the North American market, a market that's clearly very important to us. We'll continue product development and aggressive marketing so we can sustain current levels of growth. In particular, we're actively introducing a broader range of brands and categories, including apparel, in North America.

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Sales in the Dwindle business, acquired in June 2002, were \$29.6 million for the year, down 51 percent. Sales continued to contract through the year, albeit more slowly in the second half. What's the outlook for the current year, when do you expect Dwindle to make an acceptable return and is there a possibility of further write-downs associated with Dwindle on the back of continuing poor returns?

Right now we're seeing sales improve and in 2005 we expect Dwindle to increase sales by at least 20 percent and to also have a positive earnings contribution. Because of that, the underlying value of the brands is probably increasing, so no further write-downs will be necessary.

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What's driving the current growth in Dwindle sales?

CEO Michael Sonand

It's all about clear brand definition. We've got six or seven brands within the Dwindle stable and they've all now got a great team of athletes and better product We've introduced more competitive pricing, particularly of our positioning. decks, and we're promoting our brands a lot better both in the core media and in the stores. We're also servicing customers to a higher standard, with improvements in product logistics and the supply chain.

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Globe Europe had sales of \$19.7 million in 2004, down 9 percent. However, the second half saw an improvement, with sales up 50 percent year-on-year and more than double the first half figure. To what extent did the second-half turnaround reflect your new distribution arrangements in Europe? What was their contribution to earnings?

CEO Michael Sonand

In US dollar terms, European sales were up 11 percent. Europe's a growing market, and the headquarters we've recently set up at Hossegor in France has given us greater control over distribution into the market and the ability to get closer to customers. Europe's the market we're most excited about, and our multiple brands give us substantial growth opportunities. We expect Europe to be a significant contributor to our performance in the future.

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Globe reported net operating cash flow of \$17.5 million in 2004, down from \$24.4 million. Given the stronger operating earnings, this suggests a weaker working capital performance. What are the recent trends in inventory and receivables and what's the outlook for the current year?

CEO Michael Sonand

In the last 18 months we've been very focused on keeping our inventory and receivables at manageable levels. The movement in working capital was only nominal over the six months to June and we're quite happy with the current levels of inventory and receivables. Of course they'll grow as the business grows, but we'll continue to keep a very tight right rein on this aspect of our business.

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Now that you've restored the performance of your brands, what level of annual reinvestment will be necessary to maintain and grow them going forward?

The important thing is that we're focused on sustainable sales growth, rather than the short term, and that requires considered, strong investment in our brands. We'll continue to invest in our brands as we see fit to drive that growth.

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Globe repaid \$7.5 million of borrowings in 2004 and as of the end of June had net cash of \$17.2 million compared with \$4.7 million a year earlier. What's the rationale for maintaining a net cash position?

CEO Michael Sonand

As we grow our business, we'll be using that cash to fund working capital. In general, we expect to be a net user of cash going forward, but for good reason – to fund the expansion of our business. We're relatively aggressive but want to grow our business in a sensible way.

CEO Michael Sonand

Thank you Michael.

For more information about Globe International, visit www.globecorporate.com or contact Chris Oldfield on (+61) 419 309 303.

For previous Open Briefings with Globe International, or to receive future Open Briefings by e-mail, visit www.corporatefile.com.au