PRELIMINARY ANNOUNCEMENT OF AUDITED RESULTS
FOR THE YEAR ENDED 30 JUNE 2004

The Directors of Cavalier Corporation are pleased to report on the Company’s financial results for the year ended 30 June 2004.

Financial Performance

Operating revenue rose by 3% during the year to $198.6 million.

The net operating surplus attributable to shareholders of the Company was $21.0 million, compared with $18.3 million last year, an improvement of 15%. This marks another record year for the Company and makes this year the third consecutive year of record earnings. It represents earnings per share of 32.7 cents, compared with 29.0 cents in 2003.

The net operating surplus is largely the result of continuing growth in the carpet operations. It is also ahead of the $20.0 million earnings prediction we made to shareholders at the time we announced our interim results in February.

Financial Position

The Group’s financial position was further strengthened during the year by the addition of $4.2 million to shareholders’ equity.

Total assets employed were $129.7 million, an increase of $14.2 million on last year. The increase reflects, in the main, our plant expansion and upgrade programmes.

Term borrowings increased by $8.7 million over the year because we debt-funded these programmes. However, our level of borrowings remains extremely modest. Our debt to equity ratio is 37:63 and interest costs are covered 16.5 times by earnings.

Working capital remained virtually unchanged at $41.9 million despite increased trading levels over the year.

Cash Flows

Net cash flows from operating, investing, and financing activities were a positive $23.6 million, a negative $16.7 million, and a negative $7.5 million respectively.

The net cash outflow from investing activities was much higher than in previous years due to some large one-off capital spends which were required to increase manufacturing capacity. These included the following:
• $7.0 million on providing more yarn capacity for carpet manufacturing
• $1.5 million on upgrading the carpet tile dye-injection equipment
• $1.7 million on increasing facilities at Hawkes Bay Woolscourers

On top of that, there was the $1.8 million we spent on increasing our stake in Hawkes Bay Woolscourers to 92.5%.

Return on Funds Employed

The after-tax return on shareholders’ equity for this year has increased to 32.8%, up from the 2003 and 2002 years of 31.2% and 24.0% respectively.

In contrast, the after-tax return on total funds employed for this year was virtually unchanged at 21.4% despite the growth in earnings. The reason for this lies in the $8 million worth of debt-funded, but as yet incomplete, capital expenditure programmes that are yet to yield a return.

Operations

Cavalier reports in terms of two industry segments — Carpets and Wool.

Within the Carpet Operation segment, there are two distinct areas of operations, broadloom carpets and carpet tiles. The broadloom carpet operation is Cavalier’s main core business. It manufactures and markets 100% NZ woollen carpets under the well-known brands of Bremworth, Cavalier Bremworth, Knightsbridge, and Kimberley. The second distinct operation is carpet tiles. This is the Ontera Modular Carpet business based in Sydney and which markets its carpet tiles to the commercial sector under the Ontera brand. It is 89.5% owned by Cavalier, with the balance owned by Ontera management.

The Wool Operation segment comprises the wool scouring and wool acquisition businesses. The wool scouring business operates through 92.5% owned subsidiary, Hawkes Bay Woolscourers Ltd. Its scour is based in Napier and is one of two independent commission wool scourers in the North Island. The wool acquisition business operates through Elco Direct. Elco Direct provides an important service to Cavalier’s carpet operation by acquiring wool direct at the farm-gate. Both of these businesses have Cavalier as a customer, but by far the majority of its business is done with external customers.

Carpet Operation

Broadloom Carpet Operation
The broadloom carpet operation enjoyed very favourable market conditions in both its main markets of NZ and Australia in the year under review. The housing sectors in these markets, buoyed initially by low interest rates several years ago, were extremely busy. New houses were built at unprecedented levels, as were real estate resales. Both of these factors have a favourable impact on our broadloom carpet operation.

Sales for the year were $127.9 million, up $7.4 million or 6% on last year. We would have achieved much higher sales had it not been for our yarn manufacturing constraints. However, we believe that we have more than held our market share in the market segments in which we operate — this after having achieved significant market share increases over previous years.

Earnings before corporate costs, interest, and tax were $28.7 million, a 13% increase on last year’s $25.4 million. This is most pleasing.

We have embarked on a programme to further increase our yarn manufacturing capacity by some 25%. This will allow us to capture important synergies with Ontera, who currently purchase some $5 million of spun yarn from external sources. In addition, it will allow our broadloom carpet operation to bridge the gap between supply and demand for our products in the market place.

We have also purchased a new tufting machine at a cost of $2.5 million. This machine incorporates all the latest technology available and will enable us to produce carpets to another dimension. We plan to have carpet from this machine available for sale later this year.

We have been experiencing some growing pains at our carpet-manufacturing site at Papatoetoe. As a result of record production levels, space has been at a premium. To alleviate the situation, we are planning to relocate the distribution centre to a 5300m2 purpose-built warehouse close by.

Carpet Tile Operation
We acquired the carpet tile operation, Ontera Modular Carpets, on 1 July 2002. Therefore, this year marks the completion of Ontera’s second year under our management. Last year, Ontera achieved a very good maiden result. This year, we are pleased to again report that the momentum has continued.

Sales at $27.6 million were 3% down on last year. The year began slowly. Many commercial refurbishments were put on hold because of uncertainties arising from the SARS outbreak in Asia. However, as the year progressed, confidence returned and Ontera finished the year very strongly.

Earnings before corporate costs, interest, and tax were $3.5 million, up 29% on last year’s $2.7 million despite the inclusion in last year’s results of a one-off gain of $0.6 million associated with the purchase of the business. Thus, the like-for-like comparison with last year indicates an improvement of 67%, from $2.1 million to $3.5 million.

This year, we spent considerable sums of money in order to provide Ontera with a solid platform for future growth.

We successfully upgraded the Milliken dye-injection equipment to incorporate the latest technology available at a considerable spend of $1.5 million. This should provide Ontera with much better productivity as well as new product capabilities and should significantly enhance its competitiveness.

We have also successfully implemented new information systems that will strengthen Ontera’s management controls and customer service capabilities.

The current outlook for Ontera business is very positive. It is currently enjoying the buoyant market conditions that exist in the commercial building markets in Australasia, and we expect to see this continue into the 2005 year.

Wool Operation

Acquiring wool privately at the farm gate is a very competitive and unpredictable business where sellers and buyers generally have no loyalty other than to price. Elco Direct successfully operates in this market by providing its customers with excellent service.

Sales for Elco Direct for the year were down slightly on last year, as were earnings.

Our scouring operation, Hawkes Bay Woolscourers, enjoyed a very successful year. Our early decision to upgrade equipment there has produced enormous benefits for us this year, both in terms of output and quality. In this year, we achieved a significant growth in market share and, in the process, scoured what we believe to be the highest volume ever by a commission wool scourer in any one year. This has come about from its well-earned reputation for quality and service - one that is unmatched in the industry. This is what Cavalier stands for in all its businesses and is the very reason for its success today.

Sales for the Wool Operation overall for this year were $43.1 million, down $1.2 million or 3% on last year. The lower sales reflect, in the main, lower wool prices in our wool-acquisition operation and are not an indicator of reduced operating activity.

The more important indicator is earnings. In the year, our Wool Operation contributed $4.0 million of earnings before corporate costs, interest, and tax, which is 4% up on last year’s $3.8 million. This is a credible performance in a highly competitive business environment where there is no pricing premium.

The outlook for the Wool Operation is positive. It expects to hold on to its earnings for next year which would represent an outstanding return on funds employed.

Next Year’s Outlook

The Group’s performance in the coming year will hinge upon the performance of our carpet operations.

Some downturn in building activity and consumer spending has been widely predicted on both sides of the Tasman for some time. The extent to which the slowdown might affect our own businesses will depend largely on whether the respective Reserve Banks can engineer a “soft landing” as against a more radical slowdown.

In preparing our budgets for this year, we have allowed for some downturn in the carpet market, but with offsetting gains in market share associated with our increased capacity and our new tufting technology. We have also anticipated costs reduction associated with our expanded yarn-manufacturing capacity. Budget is for tax-paid earnings of $22.5 million, an increase of 7% on the 2004 year.

We will keep shareholders informed as the year progresses.

Microbial Technologies

Development work on our bio-product continues.

A busy programme of product development and field trial work has produced mixed results — some outstanding and some less so - and indicated the need for further formulation refinements.

Commercial interest in the product is very high, but the extraction of commercial value is dependent upon us demonstrating consistent, repeatable field performance.

We have made a lot of progress, and we are tantalisingly close, but we are not there yet. Commercialisation is taking far longer than we originally envisaged, and we are disappointed about that.

Nevertheless, we retain confidence in the market potential of this technology, and we are continuing to invest in it.

We will keep shareholders informed as we move forward.

Dividends

Your directors have authorised a final dividend (fully imputed) of 14.5 cents per ordinary share for the year ended 30 June 2004.

This, together with the first interim of 4.5 cents per share paid in December 2003, and the second interim of 8 cents per share paid in March this year, gives a total dividend (fully imputed) for the year of 27 cents per ordinary share. This represents an 8% increase over the 25 cents per share paid last year.

The 27 cents per share dividend represents 83% of the Group’s 2003/2004 operating surplus after tax and minority interest.

The share register will close at 5 p.m. on Friday, 1 October 2004 for the purpose of determining entitlement to the final dividend and will re-open at 9 a.m. on Monday, 4 October 2004. The final dividend will be paid on Friday, 8 October 2004.

Wayne Chung
Managing Director
20 August 2004

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