Managing Director's Address - 2009 Annual Meeting (12 November 2009)In the 2008/09 financial year, the Group earned normalised profits of $13.7m, which is a reduction of 24% on last year. This is a significant reduction, but in light of the world-wide economic turmoil that followed the Lehmann Brothers collapse just over a year ago, your Board considers the result to be reasonable under these circumstances. As a flow-on effect of this economic upheaval, we saw substantial reductions in retail spending right across the board especially in carpets and discretionary big-ticket items. It was sudden and brutal, and no businesses were spared. It was the worst turnaround in trading conditions ever experienced by the Group.
Broadloom carpets
The impact on our residential carpet sales, which account for 60% of our broadloom carpet turnover, was immediate. We enjoyed normal trading conditions in the first quarter but these quickly turned around in the last three quarters of the year. Such was the severity that our residential carpet volumes in that latter period were down a substantial 22% on the previous year. We didn't suffer nearly as much in commercial carpet sales because of the pipeline of projects that were in progress at that time but that pipeline was virtually exhausted by the end of the financial year. Broadloom carpets turnover was $157m which is up 7% on the previous year, but on a like for like basis after adjusting for the distortion created by NEC, turnover was down 14%. The lower volumes meant earnings before interest and tax were down 32% to $14.7m for the year. Carpet tiles The performance of our carpet tile business held up remarkably well. All of its sales are in the commercial sector and, as mentioned previously, the long pipeline of work-in-progress at the time of the economic slowdown provided some shelter from the harsh realities that were affecting other sectors of the economy. Sales of $53m were virtually the same as the previous year, after being 10% up in the first half. However, earnings of $7.6m were down 16% due, in part, to the intense pricing competition and our inability to fully recover the higher raw material costs occasioned by the weaker AUD. Wool operations Our wool operations encompass wool scouring and wool acquisition. Both depend on the volume of wool available which over recent years has been on the decline due to farmers moving away from sheep. That has resulted in lower wool production which in turns affects the earnings of our wool operations. Turnover in the year of $37m was down 27% on the previous year. Earnings were also down 23%. Significant achievements A significant achievement in the year was the role we played in the rationalisation of the wool scouring industry, and the subsequent and successful restructuring of the Cavalier scours to handle the extra throughput freed up from the closure of the Godfrey Hirst scours. Rationalisation of the scouring industry was much needed because of the excess scouring capacity that arose from the substantial reductions in sheep numbers over recent years as farmers switched away from sheep to dairy and dairy support for economic reasons The rationalisation process followed many months of intensive work by Cavalier and its scouring co-partner, David Ferrier, and it involved the purchase of the Godfrey Hirst wool scouring business, Commerce Commission clearance, sourcing of independent funding, and the restructuring of the Cavalier scours to cope with the extra throughput. The closure of three of the four Godfrey Hirst scour lines was needed to redress that imbalance between scouring capacity and wool available for scouring. The net outcome is the much better utilisation of the remaining plant, an enhanced return on funds employed for the two remaining players in the industry, and a more robust and sustainable business model. In the final outcome Cavalier reduced its shareholding in its scours from 92.5% to 50% and greatly enhanced its earnings from the scour and freed up $18.5m of funds. $17m of this was used to reduce Cavalier's borrowings in the 2008/09 year and the balance of $1.5m will come through in the 2009/10 year. We believe this is a great outcome and made possible only by the better utilisation of the existing equipment there. Another significant achievement is the stronger financial position of the Group. Some of the positive financial indicators for the 2008/09 year are: - Net borrowings of $64.6m, down $19.2m or 23% on the previous year
- Debt to Equity ratio of 42:58, an improvement on 50:50 the previous year
- Shareholders' funds to total assets of 45%, an improvement on 38% the previous year
The financial strength of the company allowed for the outlay of $12.5m of new capital projects that will benefit future years. Included in these capital projects were $5.7m to upgrade and expand our carpet tile facilities, and $2m at our yarn mills to improve quality and manufacturing efficiencies. I think it is fair to say that banks have become more vigilant since the global financial crisis and Cavalier's is no different. That said, I am sure we would have more than met our bank's expectations - not just in terms of being covenant compliant but also in terms of the Group's own debt reduction programme and its management of costs and preservation of cash. Finally, I want to touch on the cost reduction and business improvement programmes the Group undertook in the year. We realised very quickly the seriousness of the dramatic slow-down in business conditions and we knew that the consequent recovery was likely to be slow. There was some urgency to do things better and to reduce costs of doing business. In the process, we reviewed all our internal cost structures, and supply agreements. At the same time, we also instigated a number of productivity and quality improvement programmes across the Group. In the broadloom carpet business, for example, cost reductions alone totalled $4m per annum. In July 2009 we also instigated a freeze on all salaries Outlook We expect consumer confidence to remain fragile for at least the remainder of this financial year while unemployment remains high and has yet to peak in some countries. Our outlook for the 2009/10 financial year is therefore for residential carpet sales to remain flat and for a further softening in the commercial carpet sector. Having said this, some of the recent positive indicators on the Australian economy are encouraging and should bode well for our operations across the Tasman. The Reserve Bank of Australia has raised the official interest rate a couple of times in as many months which can only indicate that the economy there is showing good signs of recovery. This is further reinforced by the National Australia Bank September quarterly survey which has business confidence at a seven year high. As for our wool operations, the restructuring of the scours has bedded down well and the improvements in productivity and earnings have both come through in line with expectations. Our budget for the 2009/10 financial year projects after tax earnings of $14.5m which would be a 6% improvement on the previous year's normalised earnings. However, because of the uncertainties in our markets, we expressed our earnings outlook as a range from $13.5m to $15.5m in the Annual Report. Four months into the year, our earnings are down 30% on the previous year but shareholders need to be aware of the good start we had in the previous year. However, against budget, I'm pleased to report that we are 5% ahead, and we see no reason to deviate from the earnings outlook we gave shareholders in the Annual Report at this stage. Closing The 2008/09 year was the most challenging the Group has ever faced. With the number of programmes that were instigated during the year, the Group is well placed to reap the rewards of an eventual upturn. These programmes would not have been possible without the support of the Board and the staff at Cavalier and I wish to take this opportunity to formally record my appreciation and sincere thanks to them. Also, whilst I hold the floor, I wish to take the opportunity to personally thank Tony Timpson, who retires from the Board today, for all the wisdom and knowledge he has given to the people at Cavalier over his many years of service. We have all been enriched by the experience and are very grateful for that, so thank you Tony.
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