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Managing Director’s Address – 2006 Annual Meeting (9 November 2006)

Introduction

Fellow shareholders and invited guests.

It is with great pleasure that I present to you the following:

• Review of the 2006 financial year
• Microbial Project
• Feltex, and
• Outlook for 2006/07 year

Review of the 2006 financial year

In my review, I will cover the two business segments of the Group, carpets and wool.

Carpet Business

The carpet business is the mainstay of the Group. In the year of review it accounted for 78% of the Group’s revenues and 94% of the Group’s earnings. Obviously, with that degree of significance, the Group results were very dependent upon the performance of the carpet business.

In the review year, operating revenue for carpets was down 1% and EBIT 16%.

From the table, you can see the carpet business results and the breakdown between broadloom carpet and carpet tiles.

In broadloom carpets, both operating revenue and EBIT were down 4% and 21% respectively on the previous year, whereas in carpet tiles it was the opposite, showing an increase in operating revenue of 13% and EBIT of 14%.

The reason for the different performances was due to the different market conditions that prevailed for contract and retail carpet sales.

Both broadloom and carpet tiles operate in the contract sector. With broadloom carpets, contract is around 50% of its volume. With carpet tiles, it is entirely contract.

But, only broadloom carpets operate in the retail market and this is where the other 50% of its volume is. This particular market sector involves the sale of carpets mainly through the retail trade for home refurbishments and privately built new homes, as distinct from high-rise apartments and group home builders which we classify as contract.

The contract sector throughout the review year was busy with good activity around new commercial building constructions as well as office refurbishments. Cavalier, particularly in its carpet-tiles operation, benefited from these conditions. However, pricing competition for sizable contract jobs remained intense due to carpet manufacturers wanting to bridge volume shortfalls in retail.

In direct contrast, trading conditions in the retail sector were soft, mainly due to the higher interest rates which had the effect of dampening down new home building and refurbishment activities. These conditions impacted negatively on Cavalier’s retail carpet sales but the flow-on effect was even greater on its earnings as this is the high profit end of the business for Cavalier where it extracts a premium for its brand value.

Wool Business

Cavalier’s other business is in wool purchasing and scouring.

As can be seen from the table, operating revenue was down 11%, whilst EBIT was down 19%.

The lower operating revenue was caused by lower wool prices, and not by volume which was similar to last year.

In wool purchasing, we had several busy periods caused by the NZD movement which provided the incentive for our wool exporting customers to buy wool from us in order to close out their trading positions.

In wool scouring, increased costs eroded our normal margins. There were substantial increases in freight, energy, steel bands and detergents that could not be passed on because of intense business competition in an environment of surplus scouring capacity.

Revenues for wool grease, sold in USDs, were adversely affected by the strong NZD.

Consolidated

On a consolidated basis, the Group’s operating revenue was down 3%.

The tax paid surplus, before the Microbial project costs and minority interests, was $15m, down 25% on the previous year.

This was the net result of the businesses that I have just reviewed which is summarised as follows:

• Lower retail carpet sales due to the soft market conditions
• Increased contract carpet sales, but were not enough to offset the loss in earnings from retail carpet sales
• Increased operating costs and lower wool grease revenues in wool scouring

You will see that the Group’s net operating surplus was $14m, which was 2% better than the previous year. However, this is not a good indicator of performance because the previous year was distorted by the $5.8m write-off in Microbial costs.

Microbial Project

During the year the company continued to work on the project to bring to market eco-friendly remedies against flystrikes and lice on sheep. This is an alternative to the current chemical treatments that have long withholding periods and are not eco-friendly.

We have previously stated there were a number of important aspects that were worthy of further exploration before any conclusion could be reached as to the commercial viability of this project. This centred on improving the economics of the product by reducing the dose level of the Bt active, whilst still maintaining or enhancing the efficacy of the product.

The trials are in progress. There is a strict timetable that the Board is working towards and it hopes to have a result and a conclusion to these trials before the end of this calendar year.

Feltex

Since April last year when Feltex advised the market of its earnings downgrade, we have been inundated with negative press about that company. None of this has been good for the industry, including Cavalier.

During this period we were invited, as we had been on a number of occasions in the past, to look at becoming involved in Feltex. Ultimately, we chose not to because, in our assessment, it was not worth the risk. We felt it was a marginal call as to whether the business was worth the $140m that it owed the bank, and that without major synergistic gains it was not going to work for us.

Feltex was no longer the NZ based, wool carpet operation that we all remember. Following their highly leveraged purchase of Shaw Industries Australia in 2000 it was, like Godfrey Hirst, mainly an Australian based, synthetic carpet producer. Because of the similarity of these two businesses, and the market sectors in which they operate, we would have expected Godfrey Hirst to see far greater synergies from the acquisition than we would. Therefore, it was no great surprise to us when they became involved.

We have always been aware of the possibility of a Godfrey Hirst-Feltex merger. It had been a well publicised ambition of both Godfrey Hirst and the previous Feltex management for a number of years.

In our assessment the changes will be positive for Cavalier for two reasons

1. They will have the effect of lessening competition in some degree
2. When two carpet businesses are put together there is normally some sales volume and market share that drops through the cracks, and we should be a beneficiary of that.

Outlook

We have completed the first four months of the new financial year, and I can confirm that the market conditions encountered in our main markets in Australasia were similar to those outlined in our annual report.

With regards to the retail carpet market in Australia, we are starting to see an improvement in market conditions at the higher end of the market where we mainly operate, which is good news for us.

But, it is not so good news for the same sector in NZ. We are currently experiencing some softness in the market there, with consumers appearing just a little cautious and holding back on refurbishment work in case of difficult times ahead

However, the other positive news is that the contract carpet market on both sides of the Tasman remains strong, and we are seeing this particularly in carpet tiles in Australia.

The wool side of our business has performed in line with Budget and slightly better than last year.

I can report that for the four months to October, the Group’s earnings before Microbial costs were up 5% on last year, which is about where we expect to finish for the first half of the 06/07 financial year.

In our annual report we said that we have budgeted for a 5% increase in Group earnings for the June 2007 financial year. That means a tax paid earnings (before Microbial costs) of $15.3m, up from $14.6m last year. After the first 4 months, we are on track to achieving this.

But, in today’s volatile market there can be no certainties as to future earnings. Our earnings are very sensitive to the volume and mix of carpet sold which in turn is dependant upon the prevailing market conditions that the company has little influence over.

Only as recent as yesterday, the Reserve Bank in Australia put a dampener on the economy by lifting interest rates by 25 basis points to 6.25% making this the third increase in the past 6 months.

We will keep shareholders informed should there be any material deviation from our budget earnings.

Closing

Ladies and gentlemen, that concludes my review today.

Thank you.

Chairman’s Address – 2006 Annual Meeting (9 November 2006)

2006/2007 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 Wayne talk about the start to the year, and whilst he has given you some guidance on the outlook for the 2006/2007 financial year, it is too early in the year for your directors to be contemplating a change in the quantum of the first interim dividend.

I am therefore announcing, in respect of the year ending 30 June 2007, an unchanged fully imputed first interim dividend of 3 cents per share.

This dividend will be paid on 8 December 2006 to holders of shares registered at 5 pm on Friday, 1 December 2006.

Your directors advise that our overseas shareholders will also be receiving, together with their 2006/2007 first interim dividend, a supplementary dividend of 0.5294 cents per share.

Changes to the NZSX Listing Rules

In November 2004, shareholders approved a new constitution that would automatically incorporate all subsequent changes to the NZSX Listing Rules – a process that came to be known as the “autopilot” approach. This approval meant that the Company no longer has to go through the hitherto common practice of updating the constitution for these changes and then going back to shareholders to sanction the changes at an Annual Meeting.

The directors undertook at that meeting to keep shareholders informed of all future changes to the NZSX Listing Rules that would be automatically incorporated into the constitution under the “autopilot” provision.

On behalf of the directors, I advise that the NZSX Listing Rules were again amended in May of this year. As part of these amendments, Appendix 6 of the NZSX Listing Rules, which sets out those rules which are to be incorporated into the constitution, changed. Some of these rules were retained, but a number were removed from Appendix 6 altogether as part of these amendments and are therefore no longer incorporated into the constitution.

Of the rules that continue to be incorporated into the constitution following the amendments, the one relating to director nominations was changed. As a result of that change, the company is now required to announce to the market the closing date and contact details for making director nominations at least 10 business days prior to the closing date, which cannot be more than two months before the Annual Meeting. This contrasts with the old rule which required the company to announce the opening date for director nominations at least three months prior to the Annual Meeting.

The new NZSX Listing Rules and a summary of the changes are comprehensively covered on the NZX website www.nzx.com and I do not propose to go through the details at the meeting. Instead, I recommend shareholders who are interested in finding out more about these changes to visit the NZX website.

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