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Cavalier Corporation Limited Directors' Report for the year ended 30 June 2007
The Directors of Cavalier Corporation announce an audited net operating surplus after tax and minority interest of $14.9 million for the year to 30 June 2007. This represents an increase of 6% on the $14.0 million last year.
The year saw improved earnings from our carpet tile business and from our wool operations, whilst broadloom carpet earnings were level with last year. Reported earnings would have been another 2% ($0.27 million) higher but for a deferred tax write down occasioned by the recently announced reduction in the future corporate tax rate to 30%.
Financial PerformanceConsolidated Financial Performance Year Ended 30 June 2007 Audited | 2007
$000s | 2006
$000 | % change | Operating revenue | 211,703 | 201,747 | 5% | | EBIT | 28,016
| 26,449
| 6% | Net Interest expense
| -4,427
| -4,498
| 2% | Pre-tax surplus
| 23,589
| 21,951
| 7% | Tax
| -8,226
| -7,561
| 9% | Post-tax surplus
| 15,363
| 14,390
| 7% | Minority Interest
| -506
| -385
| 31% | Net operating surplus after tax and MI
| 14,857
| 14,005
| 6% | Earnings per share ($)
| 0.227
| 0.214
| 6% |
Group operating revenues for the year were $212 million, an increase of 5% on the previous year.
Operating surplus before interest, tax, and minority interests for operating activities was $28.0 million, an increase of $1.6 million, or 6%, on the 2006 year.
Financial Position The purchase of the remaining 50% of Canterbury Woolscourers in May brought in $16 million of additional assets into the Group’s financial statements. This was the main reason for the total assets increase of $13 million to $166 million at the end of June.
Retained earnings lifted shareholders’ funds attributable to shareholders of the Company by $1.9 million to $65 million at the end of June.
Cash Flows Net cash flows from operating activities of $22 million were down by $2.7 million on last year. Additional working capital was required to fund the higher business activities which saw increases in stock and trade debtors.
Operations Carpet Operations
Our carpet operations produced revenues of $166 million which was up 5% on the previous year’s $158 million.
Operating surplus (before corporate costs, interest, and tax) was $28.8 million, an increase 5% on the previous year.
Broadloom Carpets
Sales increased by 2% on last year, largely as a result of the growth coming out of residential carpet sales in Australia. Sales into the premium end of this market segment have been improving steadily in recent months - a sign that consumer confidence may be returning to the Australian market, giving us some cause for optimism for the coming year.
In NZ, with the slowdown in housing activity becoming more evident, trading conditions were tougher. Despite this, our volumes sold were similar to last year’s which was a good performance in light of the market conditions encountered.
Carpet Tiles
The commercial carpet markets on both sides of the Tasman were buoyant particularly in Australia where business confidence was at a 12 year high. There were plenty of new commercial building and leasing activities in the market place which generally created good demand for flooring materials including those of carpet tiles.
In the year, Ontera, our Sydney based carpet tile business, enjoyed strong demand for its products. Sales were up 15% for the year which came close to the production capacity of the operation. We took steps last year to expand our factory facilities and plan in the new financial year to further invest in plant and equipment in order to meet the expected growth. Future prospects for this operation look very good.
Wool Operations
Sales revenues for the wool operations were $45 million, up 4% on last year. Most of this increase was due to our scouring operations at Napier.
Operating surplus (before corporate costs, interest, and tax) for the wool operations were $1.9 million, an increase of 12% on last year.
Our wool operations consist of wool procurement and wool scouring.
In wool procurement, Elco Direct is a service provider for Cavalier’s internal use and to wool exporters at large. Elco Direct makes a margin on acquiring wool to order.
In the year under review, conditions in the wool industry were difficult for participants at all levels. Throughout the year, wool prices were depressed by the strong NZ dollar and brought lower returns for both the farmer and wool exporter. That, coupled with the reduced demand off-shore, made trading conditions the most difficult in recent years.
Elco Direct’s turnover was down 7% on last year, and its earnings were similarly affected.
Wool scouring is the other part of our wool operations. We operate on two sites, Napier and Timaru.
The Napier plant operates as Hawkes Bay Woolscourers which is 92.5% owned by Cavalier. In the year, it enjoyed excellent support from a customer base that regards the scour as the best in terms of quality and service in NZ. Sales turnover and EBIT were up 16% and 23% respectively on last year. So it was an excellent result in a very competitive market.
The other site is at Timaru which operates as Canterbury Woolscourers. In August 2004, we entered into a joint venture with two wool exporters to rationalise two existing scours onto the Timaru site and to then upgrade the existing plant to that of an efficient and modern scour. In June this year, we announced to the market that our Hawkes Bay operation had purchased the other shareholdings thus making it a fully owned subsidiary of the company as from 1 May this year.
Currently, we are being challenged to bring the Timaru scour up to the standard of our Napier operation. The rationalisation process proved more difficult than originally planned and has some way to go to be profitable. However, under a common ownership, we can now bring the two scours operationally closer together and we are already seeing some positive results from this. Also, as the scour is now seen and regarded as independently owned by the trade, we expect to receive more work and support from them in future.
Microbial Technologies
This project is ongoing until the current work programmes have been completed. The future will depend on the results of these programmes. If they show promise and there is potential for commercialisation, we will continue to be involved. If not, we would most likely cease our involvement.
Pen trials are in progress at Adelaide, and we are at the early stages of discussions with a major animal healthcare pharmaceutical company for a possible joint venture into a scab-mite remedy for sheep in the UK.
Outlook The outlook for broadloom carpets in Australia looks positive in light of the recent trends in residential, and we are confident of continuing profit growth from the carpet tile operation. However, the New Zealand market is showing signs of softness that could prove challenging. Nevertheless, we are budgeting for some volume and earnings growth from the carpet segment.
With the wool operation, we expect to see steady conditions and some upside in earnings from the anticipated improvements to the scour operations at Timaru.
Our budget for the 07/08 June year shows a modest increase in earnings on the 06/07 June year. Actual financial performance is going to be dependent on currency movements as well as market conditions. We are sensitive to the NZ dollar, with any fall in its value being positive for us and vice-versa. 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 2007 of 10.5 cents per share, an increase of 0.5 cent on the equivalent for the previous year.
This final dividend, together with the first interim of 3.0 cents per share paid in December 2006 and the second interim of 5.5 cents per share paid in March 2007, gives a total of 19 cents – 1.0 cent up on the 18 cents per share for the previous year.
The final dividend will be paid on Friday, 5th October 2007. The share register will close at 5 p.m. on Friday, 28th September 2007 for the purpose of determining entitlement to the dividend and will reopen on Monday, 1st October 2007.
Non-resident shareholders will also be receiving a supplementary dividend of 1.8529 cent per share together with their final dividend.
For and on behalf of the Board of Directors
W K Chung
Managing Director
17 August 2007
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