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Directors' Report for the year ended 30 June 2006
The Directors of Cavalier Corporation announce an audited net operating
surplus after tax and minority interests of $14.0 million for the year
to 30 June 2006. This represents an increase of 2% on the $13.7 million
last year.
However, the operating surplus from normal trading activities, which excludes
the development costs associated with our Microbial bio-remedy project, would
provide a more meaningful indicator of our results. This is especially so as
we wrote-off $5.8 million tax-paid of development costs associated with that
project in last year's results.
On this basis, the operating surplus after tax and minority interests from
our normal trading activities (bio-remedy project excluded) is $14.7 million,
which represents a decrease of 25% on the $19.5 million equivalent last year.
This is in line with the forecast that we issued at our Annual Meeting.
The results reflect reduced earnings from our broadloom carpet business because
of the slowdown in housing activities across our main markets and the continuation
of the softer market conditions that started towards the latter part of our 04/05
financial year.
Financial Performance
|
Consolidated Financial Performance Year Ended 30 June 2006 |
2006
$000s |
2005
$000 | % change | |
Operating revenue |
201,747 |
207,840 | -3% |
EBIT (before Microbial costs)
| 27,419
| 32,952
| -17% |
Net Interest expense
| -4,498
| -2,854
| -58% | Pre-tax surplus (before Microbial costs)
| 22,921
|
30,098
| -24% | Tax
| -7,881
| -10,162
| 22% | Tax paid surplus (before Microbial costs)
| 15,040
| 19,936
| -25% | Minority Interest
| -385
| -411
| 6% | Surplus after tax and MI (before Microbial costs)
| 14,655
| 19,525
| -25% | Microbial costs after tax
| -650
| -5,826
| 89% | Net operating surplus after tax and MI
| 14,005
| 13,699
| 2% | Earnings per share ($)
| 0.214
| 0.209
| 2% |
Group operating revenues for the year were $202 million, a decrease of 3% on the previous year.
Operating surplus before interest, tax, and minority interests for operating activities
(excluding the bio-remedy project) was $27.4 million, a decrease of $5.5 million, or 17%, on the 2005 year.
Financial Position
As at 30 June 2006, shareholders' funds (net of minority interests) were $63.1 million,
an increase of $0.3 million on the $62.8 million last year.
Net borrowings were unchanged, after substantial increases in the two preceding years.
Debt to equity ratio stood at 49:51, and net interest cover for the year was 5.9 times.
Cash Flows
Net cash flow from operating activities improved from $13.4 million last year,
when there were substantial increases in trade debtors and stock, to $24.7 million for the year.
In the year, we purchased $7 million of new assets and invested a further $3.6 million into
our South Island wool scouring business.
Operations Carpet Operations
Our carpet businesses produced revenues of $158 million which was virtually the same
as the previous year's $159 million. Included in these revenues was $38 million
from our tile operation, which was up 13% on the previous year. This helped to
offset the 4% decrease in broadloom carpet revenues.
Operating surplus (before corporate costs, interest, and tax) for the carpet
businesses was $27.3 million, which was a decrease of 16% on the previous year.
Broadloom Carpets
The main markets for our broadloom carpets are in Australia and New Zealand
and they can be broadly segmented into retail and contract.
Retail carpet is that sold to individual consumers through carpet retail stores
and is mainly, but not exclusively, residential business. Contract carpet is sold
in bulk, often by tender, for commercial installations. The two segments tend to
follow different economic cycles, with retail associated more with consumer confidence
and home building activites, and contract closely linked with business activities.
It is the retail segment that has slowed markedly over the past 18 months,
initially in Australia and more recently in New Zealand. In contrast, the
demand for contract carpet has remained strong on both sides of the Tasman.
However, contract carpet is by its nature more price-driven and less profitable
than retail business. Thus, we have endured margin as well as volume erosion in
this business, and these are reflected in the financial results.
As of now, there are signs that Australian retail may have bottomed out, but
New Zealand may still have some way to go. It is likely to be another 12 months
before we again see earnings growth in the broadloom carpet business.
Carpet Tiles
Our carpet tile business, Ontera, operates entirely in the contract segment.
With the good trading conditions encountered during the year, it increased both
its sales revenue and operating surplus by 13% on the previous year.
Wool Operations
Sales revenues for the wool operations were $44 million, down 11% on last year.
Most of the decrease in sales revenue was attributed to lower wool prices which
on average was down 11% on last year.
Operating surplus (before corporate costs, interest, and tax) for the wool
businesses was $1.7 million, which was a decrease of 18% on last year.
In the wool procurement business, better trading conditions returned after
a very difficult period last year. This was helped by a number of sizeable
movements in the New Zealand dollar that prompted wool exporters to buy wool.
The other part of our wool operations is the scouring business. Here,
profitability was eroded by cost increases during the year that were
not recoverable in pricing.
Microbial Technologies
Last year, we decided to write off the accumulated development expenditure
incurred on this project, having concluded that the prospects for successful
commercialisation were uncertain.
However, we are continuing to underwrite the project whilst certain avenues
for enhancement are explored. We have set benchmarks and timelines as conditions
for our continued involvement, and we remain cautiously optimistic of a positive
outcome.
The company's accounting policy is to write-off all expenditures associated with
the project as they are incurred. In the accounts this year, after-tax costs of
$0.65 million associated with this project were recognised.
Outlook
Our outlook is more positive than it was at this time last year. At that time,
the tighter economic conditions was starting to impact adversely on our retail
carpet business and, consequently, on our earnings. It also came on the back of
a record earnings performance in the preceding 03/04 year which became the benchmark
for the 04/05 year.
However, some of this is now behind us. The economic conditions for our main
business in carpets will still be tight, but we believe the retail business
in Australia has neared its bottom, and there are some signs there that conditions
could slowly improve. But, against that would be the recent interest rate rise
which could be a dampener for refurbishment spending.
In the retail business in NZ, we believe there will still be some more downside to come.
On the other hand, we have confidence that the contract business in both markets will
remain busy, which is in line with most of the market commentaries that we have seen.
Overall, we are optimistic that the carpet operations will hold their June 05/06 year's results.
As for our wool businesses, they should perform better than the June 05/06 year.
But there are still the unknowns of the extent of the New Zealand dollar fluctuations
and how much that will drive our clients, the wool exporters, into action.
We have budgeted for a 5% increase in Group earnings in the June 06/07 year,
but there are of course many uncertainties. We will keep shareholders informed
as the year progresses.
Dividends
The policy of paying dividends three times a year continues.
The Directors have declared a fully imputed final dividend for the year
ended 30 June 2006 of 10 cents per share, 4.5 cents down on the 14.5 cents
per share final dividend for the previous year.
This final dividend, together with the first interim of 3 cents per share
paid in December 2005 and the second interim of 5 cents per share paid in March 2006,
gives a total of 18 cents - 9 cents down on the 27 cents per share for the previous year.
The final dividend will be paid on Friday, 6th October 2006. The share register
will close at 5 p.m. on Friday, 29th September 2006 for the purpose of determining
entitlement to the dividend and will reopen on Monday, 2nd October 2006.
Non-resident shareholders will also be receiving a supplementary dividend
of 1.7647 cents per share together with their final dividend.
For and on behalf of the Board of Directors
W K Chung
Managing Director
18 August 2006
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