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Directors' Report for the 6 months ended 31 December 2008

The Directors of Cavalier Corporation announce an unaudited profit after tax of $7.4 million for the 6 months to 31 December 2008. This represents a decrease of 7% on the $8.0 million last year.

Group revenues for the 6 months were $132 million, an increase of 18% on last year. However, included in this amount was $29 million relating to the Norman Ellison Carpets (NEC) operation which was purchased in February 2008 and therefore not in last year’s comparative amount. On a like-for-like basis, with NEC excluded, Group revenues of $103 million for the 6 months to December 2008 were down 8% on last year.

Financial Performance

Financial Position

Shareholders’ equity as at 31 December 2008 stood at $83 million, which is an improvement of $10 million on the position last year, but a $3 million deterioration on the position as at 30 June 2008.

Our debt to equity ratio as at 31 December 2008 was 53:47, compared with 49:51 last year and 50:50 6 months ago.

Debt has increased significantly over the last 6 months through timing of capital expenditure and increasing stock levels associated with the sharp business downturn.

Management and the Board are very conscious that in the current financial turmoil, balance sheet management is crucial, and there are firm plans in place to reduce debt before the end of the financial year.

Operations

Carpet Business

Carpet turnover for the 6 months to December 2008 of $114m was 27% ahead of last year. Included in this was $29 million of turnover from NEC which was acquired in February 2008 and therefore not in last year’s comparative. On a like-for-like basis, carpet turnover was down 5%, with the fall in turnover for broadloom carpet offset to a certain extent by a 10% increase in carpet tiles turnover.

Our carpet turnover in the period was largely impacted by a dramatic slowdown in discretionary spending across all market segments as concerns of a global recession weighed heavily on people’s confidence and outlook.

Our residential carpets were the first to feel the effects of this uncertainty. This was across both our main markets in NZ and Australia with sales volume down 18% on last year.

But our commercial carpets, by comparison, fared much better as most of the projects supplied had already been committed prior to the recessionary concerns. Unfortunately, there are some ominous signs that this sector is slowing down as well.

EBIT for carpets for the 6 months to December 2008 was $14.1 million. This was down $0.9 million, or 6%, on last year due to lower residential carpet sales and the competitive pricing pressures in the marketplace.

Wool Business

Turnover of our wool operation for the December half year was $21.0 million which was down 13% on last year. This was the result of a sizeable reduction in the quantity of wool coming through for scouring because of the reduction in sheep numbers, brought about by farm conversions to dairy and dairy support, and the droughts experienced in our wool growing regions in recent years. Wool and Meat New Zealand had predicted an 8% decrease in wool production for the 2008/09 season, but our scouring volumes in the first half were down 19%. That would indicate either a build-up of wool stocks held by growers in the hope of an improvement in wool prices or much lower sheep numbers. We suspect it is probably a bit of both.

EBIT for our wool operation was $0.9m, down 21% on last year due in the main to lower volumes of wool through our scours. There were higher returns from wool grease, mainly from a lower NZD, but these were more than offset by the higher costs of labour, energy and imported materials.

Your Board announced on 15 December 2008 that it had reached agreement with David Ferrier – the 7.5% shareholder in our wool scouring operations - on a rationalisation plan aimed at reducing the current excess scouring capacity in the industry. The plan involves the initial acquisition of the two Godfrey Hirst scouring plants by Ferrier, and it is still subject to Commerce Commission and Cavalier shareholder approval. If approved, the plan is to close 3 of the 4 Godfrey Hirst scouring lines and enable, in the process, our scouring operations to secure the additional volume and to enhance their earnings by leveraging off the improved efficiencies from the increased throughput. It will also result in a reduction in Cavalier’s interest in the scouring operations from its current 92.5% to 50%.

Because David Ferrier is a related party in the transaction, the Company is required by the NZSX Listing Rules to seek the approval of shareholders. A special shareholders’ meeting will be held on 23 February 2009 to facilitate this. Shareholders would have received, in the mail, a pack containing the Chairman’s letter, the notice of meeting and an independent appraisal report by PricewaterhouseCoopers.

Outlook

We are in the midst of a global recession, brought on by the global financial and liquidity crises, and only time will tell just what the consequences are and how long it will last. The flow on effects to date have been a severe curtailing of all discretionary spends by consumers, particularly on big ticket items, and a cautious approach by commercial property developers and owners to new projects. This has led to a soft carpet market which in turn affects our turnover and earnings. Unfortunately, the immediate outlook for Cavalier and all businesses alike is for challenging times ahead. The substantial reductions in interest rates and a host of other stimulatory economic measures being undertaken by the NZ and Australian governments as well as those from numerous other countries may provide some respite, but once again, only time will tell just how effective these will be.

We are entering into uncharted economic territory, and whilst we feel that there is no way of coming up with sensible and reliable earnings forecast in this environment, we also realise the need to keep shareholders informed and have therefore attempted to provide shareholders with some earnings outlook.

On the basis of the uncertainties as explained, we are expressing our earnings outlook for the year to 30 June 2009 as a range from $11 million tax paid (which would be almost 40% down on last year) to $13 million tax paid (almost 30% down on last year). This assumes that the very soft trading conditions we have been seeing since October last year continue, but without getting substantially worse. We have made no allowance for the benefits that will arise from the wool scouring rationalisation, as this is still pending Commerce Commission and Cavalier shareholder approval.

We will update shareholders should there be a marked change in this earnings outlook.

Dividends

The policy of paying dividends three times a year continues.

The Directors have declared a fully imputed second interim dividend for the year ending 30 June 2009 of 4 cents per share, a decrease of 2 cents on the equivalent for the previous year.

This, together with the first interim dividend of 3 cents per share paid in December 2008, brings the total interim dividend (fully imputed) to 7 cents per share, 2 cents down on the previous year’s total interim dividend of 9 cents per share.

This second interim dividend will be paid on Friday, 13 March 2009. The share register will close at 5 p.m. on Friday, 6 March 2009 for the purpose of determining entitlement to the dividend and will reopen on Monday, 9 March 2009.

Non-resident shareholders will also be receiving a supplementary dividend of 0.7059 cents per share together with their second interim dividend.

For and on behalf of the Board of Directors,

W K Chung
Managing Director
20 February 2009

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