Print this Page 

Managing Director’s Address – 2007 Annual Meeting (8 November 2007)

Review of the 2007 financial year

At the same occasion last year, we provided our shareholders with an earnings forecast for the 2007 year. We said then that our budget was for a 5% increase in earnings. We are pleased to say that we ended up producing a slightly better increase of 6%.

In my review of the 2007 financial year, I will be covering the results of the carpet and wool business segments of the Group.

Carpet Business

Carpet is by far the larger of the two businesses accounting for 78% of the group’s revenues and 94% of the group’s earnings.

Our carpet business consists of broadloom carpets and carpet tiles.

In the 2007 year, operating revenue and earnings were both up 5% on the previous year.

From the table, you can see that the performances between these two were quite different.

In broadloom carpets, operating revenue was up 2% but earnings were the same as the previous year, whereas in carpet tiles it was very strong with operating revenue up 15% and earnings up 28% on the previous year.

Australia and New Zealand are the main markets for our carpet business.

The Australian commercial carpet market in the review period was very strong, buoyed by the mining resource boom, which still continues today, and business confidence was at a 12 year high. This resulted in good demand for carpets in the commercial sector and our carpets, particularly carpet tiles, benefited from these conditions.

However, the residential carpet market in Australia was subdued. The housing market, other than in Western Australia, was relatively stable after being constrained by a number of interest rate increases. Despite this, we still saw some growth returning for our carpets but, suffice to say, at levels still below those of several years ago.

We did not enjoy the same market conditions in New Zealand as we did in Australia. The market demand for carpet here was much tighter due to the NZ Reserve Bank’s policy on interest rates which was aimed at curtailing home building activity. Despite this, we achieved carpet volumes similar to the previous year, but the mix away from residential carpets in favour of commercial meant lower margins overall.

Wool Business

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

As can be seen from the table, the wool business operating revenue was up 4% and earnings were up 12%.

The better earnings performance came from our wool scouring operation at Napier where it enjoyed better volumes. Also, we were able to effect a tariff increase, the first in many years, which was much needed just to offset some of the recent costs increases.

On 1 May this year, our 97.5% owned subsidiary, Hawkes Bay Woolscourers, acquired the remaining 50% of Canterbury Woolscourers that was previously owned by Modiano and Fuhrmanns who are also wool exporters.

Canterbury Woolscourers was established in 2004 to rationalise the operations of two existing scouring plants onto one of the sites at Timaru and to upgrade the existing facilities to that of an efficient and modern scour.

The rationalisation programme has proved challenging but it is now complete and scouring excellently. The recent change of ownership to being 100% Cavalier owned and operated will engender more support from wool exporters who will value the scour as being independently operated.

Consolidated

On a consolidated basis, the Group’s operating revenue was up 5%, and earnings were up 6%.

That was slightly better than our earlier prediction, but it would have been even better had it not been for the unexpected deferred tax write-down which was the equivalent of 2% of the previous year’s earnings.

In summary, the increase in earnings was largely the result of excellent performances at our carpet tile operation and at our Napier scouring operation.

Norman Ellison Carpets

About six weeks ago, we advised shareholders that we had entered into a conditional agreement to purchase a 70% interest in Norman Ellison Carpets. The main condition outstanding is the Commerce Commission approval and we are expecting a decision later this month. If approval is granted, the effective date for this transaction will be 1 February next year.

Norman Ellison is NZ’s third largest manufacturer of tufted carpets. The other two larger manufacturers are Godfrey Hirst, who acquired the Feltex operations in November last year, and Cavalier.

Norman Ellison was founded in 1975 by its current majority owner Warwick Norman. Its operations include yarn and tufting manufacturing facilities based at Auckland, and distribution facilities at Auckland and Brisbane. It is also an importer of synthetic carpets, and has wide sales representation throughout NZ and Australia.

The proposed transaction will be effected through a new company set up to acquire the assets and business of Norman Ellison Carpets. Cavalier will own 70% of this new company while the existing shareholders the other 30%. The new company will have net operating assets of around $23m and paid up capital of $8m.

Cavalier will be issuing $5.1m of new shares at market value to the current vendors to fund its 70% of the $8m of capital in the new company, with the balance coming from borrowings.

In its first full year, the new company is expected to generate a turnover of $60m and earnings before interest, tax, and depreciation of $6.5m of which Cavalier’s share will be 70%.

That is the very broad outline of the Norman Ellison Carpets transaction, which as I’ve mentioned is still subject to Commerce Commission approval.

We are very excited by this potential purchase because:

• It should be share value positive for our shareholders, based on our earnings expectations in the first full year of operation, which includes the synergies identified,
• It allows Cavalier to participate across all the market segments and therefore presents more opportunities for growth within those segments.
• We see good growth opportunities in the Australian market because our combined market share there is still small enough to allow for this

Carpets and the environment

Sustainability and environmental issues are becoming increasingly important to users of carpets and for all the right reasons.

At Cavalier, we take these issues very seriously.

Shareholders should note that being “environmentally responsible” is one of the values in our mission statement which you will find in our Annual Report.

Our objective is to lead the industry on these matters.

This we believe we are currently doing.

Not only have we achieved the required environmental certifications by independent 3^rd parties for our carpets, but we have also further demonstrated our commitment to the environment by extending the life and/or use of our carpets thereby avoiding landfills.

Some of our notable achievements here have been:

All our carpets, tile and broadloom alike, are “Environmental Choice” certified in both NZ and Australia which means they qualify for the maximum “Green Star” points awarded to flooring materials under the Green Building Council’s rating system. This is hugely important because of the growing demand by building owners for maximum green star rating points as a way of future proofing their investment and to attract quality tenants.

For instance, the NZ Government has led the way in recognising the importance of the Green Star rating system. It has a stated policy that all new leases entered into by the Crown in CBD areas shall be in buildings with a minimum rating of 5 stars which represents “excellence” and only one class below the maximum possible rating.

All our carpet operations are certified ISO 14001, which means we have Environmental Management Systems in place to monitor our usages and wastes.

We believe we are leaders in the industry where it comes to extending the original life of our carpets.

In Ontera, our tile operation, we have the “EarthPlus” commitment where we take back our old tiles and recondition them for reuse in new installations.

And in broadloom carpets, we are trialling, in a number of sites, the use of old carpet as weed mats giving time for trees/shrubs to grow in areas of high soil erosions.

In both cases, we are diverting carpet from landfill.

Outlook for 2008 financial year

Market conditions encountered in the first four months of this financial year have been very similar to those prevailing in the 2007 year.

Our carpet sales in Australia, both commercial and residential, are up on last year. However, sales in NZ are marginally down.

But overall, carpet sales are marginally ahead of last year.

For the first four months of the 2008 financial year, Group earnings are ahead of last year by 6% and in line with our budget.

For the full year, our budget is for a 5% increase in earnings on last year. Because the purchase of Norman Ellison Carpets is still conditional upon Commerce Commission approval, we have not built any contributions from this into our budgets.

Achievement of our budget earnings will be largely dependant upon market conditions for the remaining 8 months of the year which we will have no control over. But, we will keep shareholders informed should there be any material deviation from our budget earnings.

Chairman’s Address – 2007 Annual Meeting (8 November 2007)

2007/2008 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 2007/2008 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 2008, an unchanged fully imputed first interim dividend of 3 cents per share.

This dividend will be paid on 7 December 2007 to holders of shares registered at 5 pm on Friday, 30 November 2007.

Your directors advise that our overseas shareholders will also be receiving, together with their 2007/2008 first interim dividend, a supplementary dividend of 0.5294 cents per share.

Top of the Page 

Print this Page