Annual Meeting of Shareholders - 15 November 2010 Managing Director's Address In my overview, I would like to briefly cover a number of highlights for the 2009/10 financial year. These highlights were: - A 22% increase in normalised tax-paid earnings,
- Successful restructuring of our wool scouring business,
- Benefits from cost reduction programme previously undertaken,
- A 23% reduction in net interest-bearing debt, and
- A 20% increase in dividends declared.
Financial Performance 2009/10 year
The following is a brief summation of the financial performance for the 2009/10 year - Revenue of $220m, down 11% on the previous year, but down just 3% on a like-for-like basis
- 54% of this revenue came from Australia, compared to 47% the previous year
- Profit after tax (normalised) of $16.6m, up 22% on the previous year
- Earnings per share (normalised) of 24.6c, up 21% on the previous year's 20.3c
- However, a one-off, non-cash charge to earnings of $5.2m, due to the Government's 2010 budget tax changes to depreciation on buildings in the main, reduced earnings to $11.4m.
Trading conditions for carpets were especially difficult, with building activity levels still being impacted by the Global Financial Crisis. We fared better in Australia, with residential sales recovering from the volumes of the previous year, and commercial sales, after a quiet first three quarters of the year, just starting to recover in the last quarter. But in New Zealand, market conditions remained soft after having fallen substantially as a result of the Global Financial Crisis. Of the $16.6m of normalised profit after tax in 2009/10,: - 73% came from carpets, where earnings were up 5% on the previous year,
- 24% came from wool scouring, where earnings were up significantly on the previous year, and
- 3% came from wool acquisition, where earnings were similarly up significantly on the previous year's breakeven
The significance of the segmental earnings breakdown is the much increased contribution from wool scouring and the reduced reliance on carpets. This is a very different situation from five years ago when carpets provided 94%, or the lion's share, of the Group's earnings. The earnings mix of the Group has therefore changed significantly over the last five years, with its reduced reliance on carpets and the building industry. Wool scouring could be regarded as a steady income earner because once wool is grown, it has to be scoured, whereas carpet revenue is subject to the residential and commercial building cycles that can span a number of reporting periods. In many ways, it is comforting to have a portion of earnings coming from a stable base in today's volatile trading conditions. But, when the current building cycles move into their growth phases again, we would expect carpets to once again contribute a greater share of the Group's earnings than it currently does. Successful restructuring of wool scouring business One of the highlights of the year was the successful restructuring of our wool scouring business following the purchase of the Godfrey Hirst scours in April 2009. Surplus capacity was removed as a result which allowed for the efficiencies from higher volume to flow through to earnings. We reported soon after the purchase, the successful bedding down of the operation and management's success in capturing all the identified synergies. As a result, the scours delivered a significant increase in earnings and contributed greatly to the Group's earnings in the 2009/10 year. Benefits from cost reduction programme previously undertaken In the previous 2008/09 year, we undertook extensive cost reduction programmes in response to the reduced volumes occasioned by the Global Financial Crisis. We recognised the seriousness of this crisis and the lingering effect it would have on our business. As a result, we undertook the appropriate, urgent action to reduce the cost base of our carpet business whilst ensuring that we would be well positioned to take advantage of an upturn when it occurs. We have certainly benefited from this programme. In the 2009/10 year, carpet revenue fell by 5% and whilst we would normally expect earnings to fall 15% to 20% with this level of revenue shortfall, earnings actually rose by 5%. So, we were very pleased with this outcome. 23% reduction in net interest-bearing debt Our net interest-bearing debt as at 30 June 2010 stood at $50m and represents a substantial reduction of: - $15m or 23% on the previous period's equivalent, and
- $34m or 40% on the equivalent two years ago.
These reductions were made possible by the tight controls on working capital and the independent funding of the debt previously associated with the scouring business from outside the Group. As a result, we now have a strong balance sheet, one that can withstand the current tough economic environment and allow for growth possibilities through acquisitions. 20% increase in dividends declared The 20% increase in dividends declared for the year is also identified as a highlight for 2009/10. The Company declared dividends of 18 cents for the year, which is a lift of 3 cents on the previous year. This is the direct result of a 21% lift in the Company's earnings per share (normalised) from 20.3 cents to 24.6 cents and represents a distribution ratio of 73% of earnings which is within the dividend distribution range of recent years. Outlook With four months of the 2010/11 year behind us, we can update you on our performance so far, and I am pleased to report that the results look good. Revenue is up 2.5%, and tax-paid earnings are up 19%. However, the outlook is not as rosy as the results so far would imply. The New Zealand economy remains very subdued. Both construction activity and real estate sales are very depressed, and so is consumer spending on durables as households continue to focus on retiring debt. Consequently, our New Zealand carpet sales are tracking at the lowest levels that we have seen in a very long time. On the positive side, we are enjoying good market conditions for our carpets in Australia in both commercial and residential - much as we had predicted in the 2009/10 Annual Report. The Australian economy has proven to be resilient and robust, and we are seeing good demand for our products in the better end of residential, and in commercial refurbishments. In addition, we are looking forward to a strong earnings contribution from our wool scouring interests, just as we saw in the 2009/10 year. In the 2009/10 Annual Report, we indicated that our 2010/11 budgets show a 5% increase in tax-paid earnings on the $16.6 million (normalised, tax-paid) for 2009/10. Our latest assessment is that, given the current New Zealand carpet market situation, a 5% increase might represent the top end of what we can achieve, but that somewhere in the range of last year plus or minus 5% should be realistic. On this basis, our updated earnings guidance is for tax-paid earnings in the range $15.8 to $17.5 million. Closing In light of the difficult market conditions and the flow-on effects of the Global Financial Crisis we were very pleased with our performance in the 2009/10 year. Behind the performance is the significant contribution from staff who remained loyal and dedicated. To them, my sincere thanks and appreciation. Wayne Chung Managing Director
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