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Cavalier Corporation Ltd
Managing Director's address to shareholders at the Annual Meeting held on the 10th November 2005
It is great to see you here in support of this occasion.
It is with great pleasure that I present to you a review of operations for the last year.
In my review, I will be covering the following matters:
• Review of the 2004/05 Financial Year
• New Products
• The Carpet Industry
• Microbial Project, and
• Outlook
Review of the 2004/05 Financial Year
After three successive years of record earnings, our 2004/05 earnings
took a downward turn. This served as a timely reminder that most of the
company's business, and therefore its earnings, cycles around the
activities of the housing sector which has come under pressure from
interest rate increases, particularly in Australia.
Your Directors also made the decision to write-off all the development
costs relating to the bio-remedy project of $5.6 million after tax in
the year.
Before the write-off, the Group after-tax earnings for the 2004/05 year
was $19.5 million. This was the second highest earnings recorded by the
Company, surpassed only by the previous year. I remind you that the
previous year's earnings was a record year for the company. The $19.5
million for the year under review represents a 7% decrease on that
record year, which was a credible result considering the difficult
market conditions encountered.
Carpet Operations
Carpets is the mainstay of the Group's earnings. In 2004/05, it
contributed 94% of the Group's earnings and 88% the year before that.
Earnings from carpets for the year started off well. In the first half
of the financial year, earnings were up 9% on last year. But, by the
end of the year, earnings were up only 1%.
The pressure on earnings came from lower retail sales. This was the
result of sustained pressure from interest rate increases on both sides
of the Tasman.
The housing carpet market in Australia was subdued for much of the year
and our sales there reflected that. However, our retail sales in NZ
matched last year's for most of the year, even though there was
evidence of a slow down by year end.
In direct contrast, the commercial carpet market was busy. It appeared
that business confidence was not overly affected by the higher interest
rates.
Our carpet tile operation, Ontera Modular, did particularly well in
this environment as it operates exclusively in the commercial sector.
As a result, Ontera sales increased by 22% on last year, as did its
earnings by 26% to $4.4 million. We are well placed to service the
commercial sector's needs in both tiles and broadloom carpets through
our market leading brands, Ontera and Cavalier Bremworth.
Overall, carpet turnover and earnings for the year was up 2% and 1% respectively on last year.
Wool Operations
Our wool business comprises wool procurement and wool scouring.
This was a difficult year for our wool procurement business. We found
it hard to make satisfactory margins on wool procured for our main
customer, the wool exporter. A strong NZD suppressed wool prices and
did not present many opportunities for the wool exporter to trade the
margins. This in turn limited the margins that were available to us.
In scouring, our Napier operation increased market share in the North
Island, but its profitability was eroded by increased costs and by the
low lanolin prices due to the strong NZD. Lanolin prices were as much
as 25% lower than last year.
The earnings (EBIT) of our wool operations was $2.1 million. This was down $1.9 million on last year.
At this time last year I announced that we had taken a 50% share in a
scour operation in the South Island where the plan was to consolidate
the two scour businesses into one and then to upgrade the existing
plant. I am pleased to report that the upgrading and refitting of that
scour operation has been completed and was fully commissioned in Sept
this year.
We expect this scour to bring a positive contribution to our earnings in the current financial year.
New Products
The theme for this year's annual report is Carpet Design.
This is appropriate as it exemplifies the importance of product design
to our carpet business. Product innovation and product quality are an
integral part of our business commitment. They are, in fact, the
lifeblood of our business.
At Cavalier, there is one thing we never forget - and that is, business
comes to us, not by default, but by choice. We have to earn our keep,
and we do this by staying ahead of our competitors in all facets of our
operation.
There are, of course, a number of factors that contribute to the
current success of Cavalier, but none is greater than having the right
product and the right colours to sell.
We have been well served in the broadloom carpet area by our highly
regarded product designers, Phil Leyland and Ann-Maria Bergman, who
have a combined service of 58 years with the Company. All our current
product ranges have been the result of their diligent work and their
innovative approach to design.
Over the past year there has been a huge input in refreshing the
colours of our popular ranges, while at the same time, designing new
products that are in keeping with our high brand image. As a result, we
have introduced 10 new ranges and refreshed 13 existing ranges, which
in total accounts for 40% of all our product offerings. That is
certainly the largest product development programme in any one year
that I've seen in my 23 years with the Company.
We have also been very busy at Ontera. We have just released four new
ranges there. Already there has been great deal interest shown by the
trade in these new releases. So that is very positive.
Having such an updated range of products to sell gives us an enormous
advantage as we go into what looks like a more challenging and
competitive environment.
We have some of the new products and colours on display at the rear of
this room. If you have not already done so, please take the opportunity
to view these after the meeting. Both Phil and Ann-Maria will be there
to answer any questions you may have.
The Carpet Industry
The carpet industry has received significant media exposure in recent
months and there is now a greater awareness of the state and
competitiveness of the industry.
The activities of the carpet industry tend to cycle around the levels
of new housing starts and home renovations. Its activities are
therefore very dependant upon the levels of the housing sector. In NZ
and Australia, the housing sector has enjoyed a great run which began
in 2001 when interest rates were substantially reduced. But, that
growth became unsustainable and corrective actions are being taken to
slow the pace down.
The carpet industry rode on the back of the buoyant housing sector at
the time, but is now faced with lower volumes as that sector is being
slowed.
We are currently into the tightening phase of the housing cycle. This
brings new challenges for the carpet industry, but we have met these
before. In the past we have successfully endured these downturns and
each time we have been better placed to take advantage of the cycle's
next upturn.
Microbial Project
We have been involved in the Microbial project for nine years and spent
a considerable sum of money to bring to market remedies that are
eco-friendly for the prevention of flystrike and the control of lice
infestation on sheep.
At the end of the last financial year we made the decision to write-off
all of the development costs of this project. We did so because we
concluded that the product, in its present form, may not be
sufficiently robust to ensure its commercial success. We reached the
conclusion based on the present ratio of efficacy, or effectiveness, to
production costs.
We have continued to invest in the project in order to test a
development that carries with it a reasonable scientific expectation of
a large improvement to that efficacy to cost ratio, and that is the
subject of a trial program at the moment.
If these scientific expectations are realised we will move forward. If not, we will foreclose
on the project. We should have the answers within a few months.
Outlook
We have completed the first four months of the new financial year and
the market conditions encountered on both sides of the Tasman have been
more difficult than expected. Retail carpet sales, particularly in
Australia, have continued to show weakness, but commercial carpet sales
have remained busy. However, the changes in the sales mix between
retail and commercial, and the competitive pricing pressures out there,
have impacted negatively on our earnings.
For the four months to October, the Group's earnings are down 36% on
last year, which could be where we will finish the first half.
Shareholders should appreciate that this is a comparison against what
was an all time record half year and we do not expect to be so far
behind last year's result when it comes to year-end. This is because
our second-half earnings last year were relatively soft and we expect
to come much closer to matching them in this year's half.
However, on the basis of current trends in consumer demand, and with no
change to external factors such as exchange rates, we expect that we
could finish the year 20-30% behind last year's operating earnings of
$19.5 million.
Even this necessarily broad indication of earnings could prove either
optimistic or pessimistic, if there are any significant changes to the
following key business drivers:
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Construction and renovation activity in Australia,
which is forecast to increase, and which we therefore regard as an
upside.
-
The strength of the NZ dollar, which is widely
regarded as being heavily overvalued. Any weakening of the NZ dollar
would be positive for us, and so we regard this too as a potential
upside.
-
Finally construction and renovation activity in New
Zealand, which the Reserve Bank Governor is hoping to slow down, and
which we have to regard as a downside.
If there is any material change to our year-end forecast arising out of any of these factors we will let shareholders know.
Closing
Ladies and gentlemen, that concludes my review today.
Thank you for your attention.
But, before I pass you back to our Chairman I would like to publicly
record my thanks to all staff at Cavalier for their outstanding
contributions. Our people are our Company's greatest assets and without
their support, we could not have achieved the excellent results of
recent years.
I will now pass you back to our Chairman.
Wayne Chung
Managing Director
10 November 2005
Cavalier Corporation Ltd
Chairman's address to shareholders at the Annual Meeting held on the 10th November 2005
First Interim Dividend
As you are all aware, the Company pays its dividends to shareholders
three times a year, with the first announced at the Annual Meeting.
You have all heard our Managing Director talk about the difficult start to the year and the outlook.
Because the Company has historically returned a significant proportion
of its earnings back to shareholders as dividends, one of the
consequences of our businesses entering the down cycle, and reduced
level of earnings, is the need to adjust our dividend payments.
I am therefore announcing, in respect of the year ending 30 June 2006,
a fully imputed first interim dividend of 3 cents per share - a
reduction of 1.5 cents on the 4.5 cents per share first interim
dividend paid last year.
This dividend will be paid on 9 December 2005 to holders of shares registered at 5 pm on Friday, 2 December 2005.
Your directors advise that our overseas shareholders will also be
receiving, together with their 2005/2006 first interim dividend, a
supplementary dividend of 0.5294 cents per share.
Alan James
Chairman
10 November 2005
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