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Managing Director's Address - 2008 Annual Meeting (13 November 2008)

The Group achieved, in the June 2008 financial year, earnings after tax of $17.9m which was up 14% on the previous year. This was also well up on those expectations that I shared with you all at last year’s Annual Meeting.

Revenue was $250m, up 22% on the previous year.

Included in the Group results for the first time was five months of trading from Norman Ellison Carpets which Cavalier acquired in February this year. Its contribution obviously helped to lift the Group’s performance, but I’m pleased to say that even on a like-for-like basis and with the Norman Ellison Carpets results excluded, the Group’s earnings would still have been up a respectable 7% on turnover 10% higher.

Overall, we were very pleased with the results which came from excellent performances across both the carpet and wool businesses.

Carpet Business

Our carpet business consists of broadloom carpets and carpet tiles.

Carpet sales were up $37.0m/23% on the previous year, with $24.0m of that increase coming from the newly-acquired Norman Ellison Carpets. A further $4.0m of the increase in sales came from the existing Cavalier Bremworth broadloom carpet operation and $9.0m from carpet tiles.

EBIT was also up 8% to $30.5m.

Our carpet tile operation, Ontera, was again an outstanding performer, with a 44% increase in its EBIT to $9.1m. This was assisted by a buoyant commercial market in Australia where there was good refurbishment activity as well as new building starts. But one must also acknowledge that this level of performance would not have been possible had it not been for the very well managed operation - supported by excellent innovative products and a very able sales force that continually sets the benchmark for customer service within the industry.

We see the growth in carpet tiles to continue over the medium to long term. There will be temporary set-backs along the way, but we are confident that the popularity and acceptance of carpet tiles as the flooring product of choice in a whole myriad of commercial installations will continue to grow well into the future.

So, it was with this in mind that the Board approved recently an additional $4m of capital spends to enable a doubling of production capacity at Ontera.

Ontera currently has a dominant position in the premium, high quality end of the tile market, but this latest initiative will allow Ontera to broaden its product base and to increase its participation in the lower segments of the tile market.

Our broadloom carpet operations, on the other hand, did not perform as well.

Revenue was up 3% for the existing Cavalier Bremworth operation - that is, after excluding the additional revenue from the recently-acquired Norman Ellison Carpets.

Earnings, however, were down 3%, due to the soft market conditions for residential carpets and lower margins from higher costs of raw materials, freight, labour and overheads.

Our main residential markets in Australia and New Zealand were soft due to low housing activities occasioned by high mortgage interest rates, lower new housing starts and lower real estate sales. Despite these difficult conditions, we did well in Australia where there was a greater propensity to spend at the premium end of the market, but in NZ, we only managed to just hold onto our market share.

In February this year, we purchased a 70% interest in Norman Ellison Carpets. Management on both sides worked very hard right from the outset to ensure that all the synergies that were identified during due diligence were realised and I’m pleased to report that its integration into the Cavalier Group went extremely well.

Wool Business

Cavalier’s other business is wool purchasing and scouring.

As can be seen from the table, operating revenue for the wool business was up 16% and earnings were up 124% on the previous year.

These comparatives to last year were helped by the accounting treatment of our South Island scouring operation as we purchased the remaining 50% on 1 May 2007. As a result the 2007 year comparative had only 2 months of results from this operation.

Nevertheless, even with this discounted, the wool business still performed ahead of last year.

In wool scouring both volumes and earnings were ahead of last year on a like for like basis. Increased revenues from wool grease provided some relief from the increased operational costs in energy, labour, and steel bands.

The wool industry is currently undergoing some dramatic changes. Because of the recent poor returns from sheep meat and wool, a number of farmers have converted their farms to dairy and dairy support. Meat and Wool NZ has predicted that the sheep population in the current year will be down 8% on last year. This will mean less wool available which in turn reduces the amount of work available for our scouring operation.

So the challenge for our wool operations in the current year will be volume. However, on the upside we may see some better margins arising out of the much weaker cross rate with the US dollar now prevailing.

Consolidated

On a consolidated basis, the Group’s operating revenue was up 22%.

Earnings after tax were up 14% and helped to lift earnings per share from 24.0c to 27.1c and improved our return on equity from 22.2% to 22.8%.

Update for 2009 financial year
       
A couple of months ago when we announced these results we were cautiously optimistic about the year ahead. We knew that consumer markets for carpet were going to be tougher, and that wool volumes were going to be a challenge for our scours. However, on the favourable side of the ledger we had a continuing very strong performance from the carpet tile operation, and a very strong Australian Dollar against both the USD and the NZD that was going to be in our favour. Other pluses were that we would have the benefit of a full year’s contribution from NEC and of a 10% reduction in the corporate tax rate. Overall we felt that we should be able to maintain some earnings growth.

But how things have changed in the light of the global financial crisis. The dramatic fall in equity and real estate markets has eroded consumer confidence, and a decline in discretionary spending is an inevitable result that is bound to hurt our carpet business. The severity and duration of the downturn will depend on the ability of governments and markets around the world to restore confidence in the global economy.

In the circumstances it is difficult to provide sensible earnings guidance for the current year at this stage. After the first four months Group earnings were down just 2% on last year, but the next eight months will be much harder. Shareholders can be assured, though, that we will do everything we can to protect earnings and limit the consequences of this global upheaval on Cavalier.

We look forward to updating you again in February, when we should have a better idea of the market environment that we are facing. 

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