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5 November 2004
Dear Shareholders,
I am pleased to attach a copy of my address and extracts of the Chairman’s address to the Annual Meeting held on Thursday, 4 November 2004.
The directors announced, at that meeting, a fully imputed first interim dividend of 4.5 cents per share for the year ending 30 June 2005 — unchanged on the previous year’s first interim dividend. The share register will close at 5 p.m. on Friday, 3 December 2004 for the purpose of determining entitlement to the first interim dividend will re-open at 9 a.m. on Monday, 6 December 2004. This dividend will be paid on Friday, 10 December 2004.
Shareholders at the meeting also resolved that:
• Anthony Timpson be re-elected a director of the company;
• Alan James be re-elected a director of the company;
• Victor Tan be elected a director of the company;
• Keith Thorpe be elected a director of the company;
• the existing constitution of the company be revoked and the company adopt the new constitution in the form tabled at the meeting and signed by the chairman for the purpose of identification; and
• further to the resolution of shareholders at the company’s 2002 Annual Meeting held on 13 November 2002 approving the issue of rights to executive directors of the company and selected senior executives of the Group (“First Resolution”), the company approve the issue of the balance of those rights under the First Resolution by an additional tranche on or before 30 November 2004 provided that all of the terms of the First Resolution shall otherwise continue to apply to the issue of rights in that additional tranche.
I look forward to reporting to you all again in the new year.
Yours sincerely,
Wayne Chung
Managing Director
Cavalier Corporation Ltd
2004 Annual Meeting
Managing Director’s Address
Fellow shareholders and Board members, and invited guests.
Good morning to you all, and thank you for attending our Annual Meeting.
It is a real pleasure for me to present to you a review of the operations of Cavalier Corporation.
In the review, I will be covering the following matters:
• Review of the 2004 financial year
• Capital expenditure
• Return on assets employed and shareholder wealth
• Woolscouring
• Microbial project, and
• Outlook
Review of the 2004 financial year
The 2004 financial year under review was an eventful one for Cavalier. It was a year in which we achieved record tax-paid earnings of $21 million, an increase of 15% on the previous year’s record and better than our earlier announced forecast of a 10% increase.
This result translates into earnings of 33 cents per share, an increase of 4 cents on the 29 cents a year ago. And that allowed us to pay you, our shareholder, an extra dividend of 2 cents per share bringing the total to 27 cents, fully imputed, for the 2004 financial year.
A detailed review of our operations is contained in our Annual Report which I invite you to read if you have not already done so. Extra copies of our Annual Report are available at the back of the room.
The market conditions in the year under review were generally positive for both our carpet and our wool business.
Our broadloom carpet business, which produced 79% of the Group’s earnings during the year, was the most significant contributor for Cavalier. Its earnings were 13% ahead of the year before and well up on budget. It was helped by favourable market conditions on both sides of the Tasman where there were high levels of building activity and real estate sales.
The commercial building sector was also busy. In Australia, the start of the year was slow, but picked up momentum towards the end of our financial year. In NZ, it was pretty much steady throughout.
Our carpet-tile operation, Ontera Modular, also benefited from these market conditions and from the lower imported costs arising from the strong Australian dollar. Earnings before interest and tax from this operation were $3.5 million, up 29% on the previous year.
Our wool operations enjoyed a good year too. Our scouring operation at Napier increased market share and scoured to its seasonal capacity. Excellent quality, outstanding customer service, and a focused management team contributed to our success here.
In summary, all our business units performed well in the 2004 financial year. They each played their part, and they collectively produced another year of record earnings for Cavalier.
Capital expenditure
We invested $15 million of capital expenditure in the 2004 financial year, which was three to four times what we would normally spend. More than half of this amount was spent on providing more capacity which would allow us to further grow our business.
Within this was $7 million for increasing yarn making facilities at our Wanganui spinning mill. When fully operational, it will increase our yarn making capacity by some 25%. Of this increase, 30% will go to Ontera, our carpet-tile operation, as a replacement for externally sourced yarn, while the remaining 70% will go towards servicing growth in our broadloom carpet business.
Projects of this magnitude take time to implement and time for earnings to come through. The Wanganui project has only just started producing woollen yarn, some 10 months after it commenced, and it will take many more months yet before it becomes fully operational. Some of the planned earnings from this project are not scheduled to come through until the beginning of our next financial year.
Also included in this year’s spend was an important $1.5 million upgrade to the carpet-tile printer at Ontera. This has provided for more capacity and has greatly improved the print quality of our tiles, thus ensuring that Ontera remains the market leader in its field.
Funding these projects is not an issue as our conservatively geared balance sheet allows us to easily access bank borrowings. But, finding these projects often is. So, to have this amount of capital expenditure means that we have successfully identified opportunities that should, in time, allow us to further grow shareholder wealth. And that should be good news for our shareholders.
We wish to assure shareholders that all our discretionary capital spends require a minimum 15% pa tax-paid return which should be value positive for them because it exceeds the financial market’s benchmark of 10%.
Return on Assets Employed and Shareholder Wealth
Shareholders can be assured of the Board and management’s continual focus on return on funds employed in our business, because we recognise that it is a key driver of shareholder wealth.
Over the last four years, our tax-paid return on net assets employed has greatly improved from 12% to 21%. And this can be seen from the table as shown.
Return on Net Assets
Employed |
Year 2004 |
Year 2003 |
Year 2002 |
Year 2001 |
| Tax-paid EBIT |
$22.8m |
$20.2m |
$14.8m |
$11.6m |
| Net assets employed |
$106.8m |
$93.2m |
$90.3m |
$94.2m |
| |
|
|
|
|
| Tax-paid EBIT to NAE |
21.4% |
21.6% |
16.4% |
12.4% |
The reasons for these outstanding returns have been the successful restructuring of our wool operation in 2001 and the marked increase in earnings from our carpet operations.
The financial market’s benchmark for Cavalier for returns on assets employed is around 10% pa tax-paid. That means any returns from new investments or new funds employed that exceed 10% create value for our shareholders. Conversely, any returns below that destroy value for our shareholders.
In 2004, we increased tax-paid EBIT and net assets employed by $2.6 million and $13.4 million respectively, thus giving a return of 19% on the increased net assets employed. This lowered the overall average to 21.4% for the year, but should still shareholder value positive because the 19% is above the market’s benchmark for Cavalier. Remember also that these figures do not include the full earnings potential from some of the new projects.
Shareholders who have supported Cavalier over past years have done very well.
|
Investment period to
30 Jun 2004 |
Cavalier Shares
Return pa (compounded) |
NZX50 Index
Return pa (compounded) |
|
4 years |
37% |
10% |
|
3 years |
27% |
12% |
|
2 years |
31% |
16% |
|
1 year |
6% |
22% |
For shareholders who purchased Cavalier shares four years ago on 1 July 2000, their rate of return would be an outstanding 37% compounded annually.
And for those who purchased three years ago, it would be 27% compounded annually.
For shareholders who purchased two years ago, it would be 31% compounded annually.
And for those who purchased one year ago, it would be 6%.
All these returns have outperformed the NZX50 index, as you can see from the table, with the exception of the one-year investment period.
The 6% one year return is, of course, disappointing and even more so as we’ve seen our share price come back over the last few days.
The main reason for this has been the change in market sentiments towards companies, like Cavalier, who are associated with the building and housing sectors. Currently, the market sees both these sectors to be at the top of their business cycles and expects them to come under pressure from the recent interest rate increases.
Warren Buffett, a renowned and highly successful American sharemarket investor, said that share-markets transfer wealth from the impatient to the patient. The message here is that you need to be patient by taking a longer-term view when investing in the sharemarket. For the Cavalier shareholder, who has supported us for sometime, your patience has been well rewarded. And for the recent Cavalier shareholder, your patience is required.
Woolscouring
Our scouring operation in the North Island, Hawkes Bay Woolscourers, has proven to be an outstanding success. It made substantial progress in lifting productivity and improving quality. By excelling in the areas of customer service and quality, it has significantly grown volume and market share. It also produced, in the 2004 year, an excellent tax-paid return on net funds employed of 28%.
Building on the success of HBWS, we have extended our scouring operations into the South Island.
In August this year, we acquired a 50% interest in Canterbury Woolscourers, a company formed to purchase two scouring businesses in the Canterbury region, one located at Winchester and the other at Washdyke.
Eventually, the company will operate from the Washdyke site where the scour-line there will be completely upgraded and a brand new three-metre wide scour line incorporating the latest technology available will be installed.
The upgrade programme is already underway, but it will take us to the end of June 2005 to complete that and to commission the new three metre wide scour. Given the disruptions and the inefficiencies of having to operate from two sites in the meantime, we will only breakeven this year. However, once we are fully operational on the one site post June 2005, we expect our investment to generate around $1m of tax-paid earnings per annum for Cavalier.
Microbial Project
The Microbial project involves bringing to market a natural remedy, which uses a strain of bacteria called Bacillus thuringiensis, or Bt as it is more commonly known, as the active ingredient, for the prevention of flystrike and the control of lice and scab-mites in sheep.
For those living in West Auckland, you would be aware of the use of Bt to eradicate the painted apple moth in your area. The Bt strain used there is different from ours, but the principles are the same.
We have been involved in this project for eight years and have spent $5.8 million on development and $1.7 million on a pilot plant. It has taken us longer than we had originally thought to get this far, but in context of the product that we are attempting to bring onto the market, this is not unusually long.
It is still in its development stage, and there is still more work to be done.
It continues to be an important project for Cavalier and receives the full support of your Board.
The recent field trials for the lice programme have produced mixed results which indicate a need for further refinements to the formulation.
However, with any refinement comes the need to do small pen trials first so that the effects of these refinements can be carefully monitored. There are only certain times of the year when we can best do these trials. It all adds up to being a lengthy and time consuming process. Unfortunately, that is the nature of the product we are dealing with.
As noted in the Question and Answer section of the Annual Report, the high risk and reward of this project go hand in hand.
In the Annual Report, I reminded shareholders that there was the possibility of the project coming to nothing. If that were to happen, we would have to write-off our investment in the project. The after tax effect of that write-off of the amounts spent to June 2004 represents around 8% of shareholders’ funds. Whilst that would affect our reported results for the year in question, there would be no impact on our cash flow and hence our ability to pay dividends.
However, if the project succeeds, we would quickly recover the development costs from the earnings generated and it would be very value positive for shareholders.
Outlook
I indicated in the Annual Report that we had budgeted for tax-paid earnings of $22.5 million for the 2005 financial year, which is an increase of 7% on the 2004 year. In arriving at this amount, we allowed for some downturn in the carpet market, but with offsetting gains in market share associated with our expanded yarn manufacturing capacity.
For the first four months to October, our tax-paid earnings were 4% up on the 2004-year, which is behind the 7% budget increase.
It is much too early to predict how the rest of the year will finish up as much will depend on the market conditions, which, for now, are being constrained by recent interest rate increases. Of late, there has been some minor slowdown in residential carpet sales, but the commercial carpet sector is still very busy.
The current high NZD against the AUD is a concern to us. We have the first half of this financial year hedged at a favourable exchange rate of .86. If the current high exchange rate remains, it will negatively impact on our earnings in the second half of the financial year.
But there are some offsetting gains. A higher NZD lowers our imported material costs and puts downward pressure on wool prices. And we will also have the benefits flowing from the capital spends referred to earlier.
We will be able to give shareholders a better indication of our earnings outlook at our half- year result announcement in February 2005.
Staff Acknowledgement
We are ever mindful that our success comes from our people and we are proud to, once again, publish their names on the back of our Annual Report as an acknowledgement of that and their importance to us.
On behalf of the Board and our shareholders, I would like to record publicly a special thank-you to all our staff for their loyal and dedicated support and for their invaluable contribution and commitment to Cavalier.
Ladies and gentlemen, that concludes my presentation. Thank you for your attention and your commitment to Cavalier as shareholders. I will now hand you back to Alan James our Chairman.
Wayne Chung
4 November 2004
Cavalier Corporation Ltd
2004 Annual Meeting
Chairman’s Address
(extracts)
Ladies and gentlemen
I endorse the remarks of Wayne Chung, and I wish to take this opportunity to thank, on behalf of the Board, Wayne, management and staff at all our operations for their efforts over the last year.
You have all heard Wayne talk about the return on assets employed and shareholder wealth. Over the last three years, the Company has achieved a compounding tax-paid return for shareholders of 26% per year, or 100% in total. For the same period, the NZX50 gross index has returned 53% in total (or 15% compounding), meaning that Cavalier has outperformed the index by 89%.
As a result of this performance, the executive share rights issued to the executive directors and other senior executives of the Company in November 2001, and soon maturing, are in the money.
The 100% return means that the 1.6 million rights, after adjusting for the 2:1 share split in December 2002, will result in the issue of approximately 608,000 new shares to the executive directors and senior executives of the Company next week. This equates to a 1% dilution of existing shareholders’ equity — in effect, diluting the 100% return of the last three years to 99%. Had Cavalier, like the NZX50 gross index, delivered a 53% return over the three years, the share rights would have yielded only 307,000 shares.
I am sure that the majority of shareholders will be more than happy to be sharing a small percentage of their gains with the executive team that created them. I know that the two major shareholders are.
Wayne and I will now be pleased to deal with any questions you may have on the material contained in the Annual Report and in Wayne’s address to the meeting.
Alan James
4 November 2004
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