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Directors' Report for the year ended 30 June 2009

The Directors of Cavalier Corporation announce an audited tax-paid profit of $14.9 million for the year to 30 June 2009, which represents a decrease of 17% on the $17.9 million last year.

Included in the result is a one-off gain of $1.8 million relating to the restructuring of our wool scouring interests and a $0.6 million impairment loss on trademarks.

Excluding the one-off items, normalised tax-paid earnings are $13.7 million, a 24% decrease on last year. The result is better than the guidance we provided to the market in November last year of between $11 million to $13 million due, in the main, to better than expected performance in our Australian carpet operations. 

As a result of the world-wide economic turmoil, trading conditions over the last three quarters of the year were extremely subdued. Whilst it gives Directors no pleasure to report a substantial earnings downturn, we consider the results more than reasonable in the circumstances.

Revenue for the year is $247 million, down just 1% on last year. However, on a like-for-like basis, revenue is down by 12%. The comparatives are affected by two changes:

(1)  The acquisition of the Norman Ellison Carpets ("NEC") operation in February 2008, which means that there was only five months of revenue of the NEC operation in the comparatives; and

(2)  The deconsolidation of our wool scouring interests in mid-April which means that there are only 9.5 months of wool scouring revenue in the current 2008/09 year.

Financial Performance

Financial Position

The Group's net interest-bearing debt as at 30 June 2009 of $64.6 million is down $19.2 million on last year, largely due to lower levels of stocks and debtors, and the fact that the funding requirements of our wool scouring interests are now independently provided for from outside the Group.

As a result, the Group's net interest-bearing debt to equity ratio improved from 50:50 last year to 42:58 this year.

The Group's total assets as at 30 June are $196 million, a decrease of $26 million on last year, brought about by the substantial reduction in stocks and debtors of $14 million, and the deconsolidation of the wool scouring operation on its change from a subsidiary to an associate in April this year.

At the same time, shareholders' funds increased by $2.5 million for the year, mainly from retained earnings, which improved the proprietorship ratio (shareholders' funds to total assets) to 45%, up from 38% last year.

Overall, there is an improvement, and strengthening, of the financial position of the Group on last year as seen by the higher proprietorship ratio and the much lower net interest- bearing debt to equity ratio.

Cash Flows

Cash flows from operations are $26.6 million, or 10%, down on last year mainly on the back of the lower earnings. A positive from these flows was the substantial reduction in inventory of $5.3 million which we achieved without affecting our normal high level of customer service.

During the year, we spent $12.5 million on property, plant and equipment with $5.7 million of this brought forward from last year. Major expenditures were $5.4 million for upgrading and expanding our carpet tile facilities and $2.0 million at our yarn mills to improve quality and manufacturing efficiencies.

Included in the cash flows from financing activities is the repayment of a $16.8 million loan from our scouring operation which is now independently funded from outside the Group.

Overall, the positive cash flows for the year allowed for a substantial reduction in Group borrowings. Net interest-bearing debt at 30 June 2009 is $64.6 million, compared with $83.8 million the same time last year, a reduction of $19.2 million.

Operations

Carpet Operations

Turnover for our carpet operations for the year is $210 million, up 5% on last year. Included in the amount is a full year for NEC, against five months last year as the business was acquired in February 2008. On a like-for-like basis, turnover is down 11% on last year with virtually all of this coming from broadloom carpets.

Earnings before interest and tax are $22.3 million, which is down 27% on last year.  

Our carpet operations consist of broadloom carpets and carpet tiles.

Broadloom Carpets

Turnover for the year of $157 million is up 7% on last year, but on a like-for-like basis (that is, with the removal of the distortion created by NEC), turnover is down 14%.

After the first quarter of trading, market conditions encountered were the worst ever in the history of the company. The credit blow-out in the USA and the events that followed made their presences felt in economies around the world and the impact on consumer spending was almost instant. As a result, spending on discretionary items slowed right down, especially "big ticket" items of which carpet is one.

Our broadloom carpet operation, where 60% of its volume is exposed to the residential housing market, felt the full brunt of this. Over the course of the year, volumes were down 16% with Australia performing much better than NZ. Suffice to say, none of our competitors were spared from the onslaught, but through our much higher brand values and excellent customer service, we gained market share in the process.

Earnings before interest and tax of $14.7 million are down 32% on last year. This is attributed, in the main, to the 16% volume shortfall, but competitive pricing pressures featured as well.

With the pace of change in market sentiments and the prospect of only a slow recovery to follow, management successfully undertook a wide-ranging programme aimed at reducing operating costs in the business - one that would allow the company to successfully weather the downturn and set a strong platform for earnings growth as activity levels recover.

Carpet Tiles

Our carpet tile operation performed admirably despite the adverse market conditions encountered.

Turnover was $53 million, virtually the same as last year. This is an excellent performance and bears testimony to the Ontera brand which is held in high regard amongst architects, specifiers and building owners in the market place.

Earnings (before interest and tax) of $7.6 million are down 16% on last year. Despite the excellent turnover, intense pricing competition in the market and the inability to fully recover higher imported raw material costs saw erosion in margins.

During the year, we completed a $5.4 million capital expenditure programme which expanded and upgraded the manufacturing facilities at our Sydney based operation. These include upgrading the Millitron printer and automating the backing and finishing lines to provide for a doubling of capacity. 

Wool Operations

Our wool operations consist of wool scouring and wool purchasing.

Our wool scouring operation entered into an arrangement with David Ferrier interests to bring about a rationalisation of the wool scouring industry in NZ which was completed on 16 April 2009. On that date, Cavalier's interest in its wool scouring operation was reduced to 50%. Included in the accounts is a one-off gain of $1.8 million arising from the transaction. 

The rationalisation went extremely well, and we captured all the synergistic benefits identified at the outset of the project. Full credit for this must go to the dedicated team that made it all happen. We now have a far better, and more robust, business model to operate from, and the value of Cavalier's investment in this operation has been greatly increased as a result.

For the June 2008/09 year, our wool operation achieved a turnover of $37 million, down 27% on last year. However, on a like-for-like basis, turnover is down 17% with wool scouring up 6% and wool purchasing down 26%. The increase in wool scouring turnover is due to the higher throughput post rationalisation and higher lanolin revenues. The decrease in wool purchasing turnover can be attributed to the fall off in world-wide demand for wool which negatively affected both price and volume.

Earnings before interest and tax are $4.3 million, down 23% on last year due to a poor wool purchasing result (attributable to wool prices plummeting to 20 year lows) and to the change in the accounting for the wool scouring entity as an associate for the last 2.5 months of the year. On top of the earnings before interest and tax is the $430k of our share of the tax-paid earnings of the wool scouring entity for that period since 16 April 2009.

Outlook

We are still in the midst of a world-wide recession that has so far caused untold damage to people's net wealth and consumer confidence. Whilst some commentators are starting to focus on the emergence of "green shoots" in some sectors of the global economy, the fact remains that unemployment in both New Zealand and Australia have yet to peak, so consumer confidence is expected to remain volatile and fragile for at least another year.

Demand for carpets is heavily dependent upon the activity levels in the commercial and residential building sectors. We are more exposed to refurbishments, as opposed to new housing starts, which in today's difficult climate works in our favour. Our outlook for the next financial year (2009/10) is for the residential sector to remain relatively flat and for further softening in the commercial sector. That said, we believe our excellent standing in the market place will hold us in good stead.

As for our wool scouring interest, the enlarged operation has bedded down well and we therefore see minimal operational risks. The risk, however, will be in the volume of wool available for scouring which is essentially a function of the stock pile of greasy wool, sheep numbers and the international demand for wool. We believe the volume of wool available for scouring in the new financial year (2009/10) should be up slightly on last year on the back of improved demand for wool and the consequent run down in the greasy wool stock pile.

Looking forward, the positives for us are twofold. First, there is our recently completed efficiency and cost reduction programmes and our enhanced ability to outperform the carpet market. The second is our wool scouring operation which operates in an industry that is now more robust and where there is more balance between capacity and wool available for scouring.

The budgets we have drawn up for the new 2009/10 year project tax-paid earnings of $14.5 million, which would be a 6% improvement on last year's normalised earnings of $13.7 million.

However, given the uncertainties in operating conditions and the economic outlook, we are expressing our 2009/10 earnings outlook as a range from $13.5 million to $15.5 million. This is predicated on the trading conditions as outlined, but should these change significantly, we will advise shareholders.  

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 2009 of 8 cents per share, a decrease of 3 cents on the equivalent for the previous year.

This final dividend, together with the first interim of 3.0 cents per share paid in December 2008 and the second interim of 4 cents per share paid in March 2009, gives a total of 15 cents - 5 cents down on the 20 cents per share for the previous year.

The final dividend will be paid on Friday, 16 October 2009. The share register will close at 5 p.m. on Friday, 2 October 2009 for the purpose of determining entitlement to the dividend (the record date) and will reopen on Monday, 5 October 2009.

Non-resident shareholders will also be receiving a supplementary dividend of 1.4118 cents per share together with their final dividend.

The Company is in the process of introducing a dividend re-investment plan (DRP) which will apply to the final dividend. Shareholders can expect to receive the DRP Offer Booklet which outlines the terms of the DRP in the first week in September. The DRP is totally optional, and it gives our shareholders the choice of continuing to receive their dividends in cash or having all or a portion in the form of additional shares in the Company. The strike price for determining the number of shares to be issued in lieu of cash dividends will be the volume weighted average sale price of all price-setting trades on the NZX over the five trading days immediately after the record date.

Shareholders will also be receiving, together with the DRP Offer Booklet, a Participation Notice and all shareholders who wish to participate will have until the record date to return the Participation Notice.

For and on behalf of the Board of Directors

Wayne Chung

Managing Director

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