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Directors' Report for the 6 months ended 31 December 2009

The Directors of Cavalier Corporation announce an unaudited profit after tax of $7.0 million for the six months to 31 December 2009. This represents a decrease of 6% on the $7.4 million the previous year.

Whilst the results for the period are down on the previous year's, the Directors consider these to be more than reasonable given that we are benchmarking ourselves against a six month period when the effects of the New Zealand recession and the fallout from the global financial crisis were only just starting to be felt.

When comparing the detailed results for the current period with those for the previous year's, shareholders should note that the Cavalier Wool Holdings Limited wool processing operation was accounted for as a subsidiary in the previous year, but as an associate in the current period.

Group revenue for the six months was $113 million, a decrease of 14% on the $132 million the previous year.

On a like-for-like basis and with the revenue of Cavalier Wool Holdings excluded from the comparative, for reasons as explained above, Group revenue would be down 7% on the previous year.

Return on average shareholders' equity for the six months was 15.9% and earnings per share was 20.8 cents (both annualised), compared with 17.7% and 22.2 cents respectively the previous year.

The weaker results reflect adverse market conditions for the carpet business offset to some extent by a much-improved wool processing business as a direct result of the wool processing industry rationalisation and the restructuring we undertook in April last year.

Financial Performance

Financial Position

Shareholders' equity at 31 December 2009 stood at $89.2 million, which is an improvement of $6.7 million on the $82.5 million a year ago and $1.6 million on the $87.6 million at 30 June 2009.

At the same time, total assets employed at 31 December 2009 came in at $188 million, compared with $227 million a year ago and $196 million at 30 June 2009.

As a result, shareholders' equity accounted for 48% of total assets employed at balance date, compared with just 36% a year ago and 45% at 30 June 2009.

Net debt at balance date stood at $57.3 million and net debt to equity ratio was 39:61. These can be compared with $92.9 million and 53:47 respectively the previous year and $64.6 million and 42:58 respectively six months ago.

The Group's much-improved financial position over the past 12 months - due, in the main, to the funds released from the reduction in working capital employed in the business and from the successful restructuring of the Group's wool processing interests - will see it well-positioned to weather the current difficult operating environment, but more importantly to capitalise on any opportunities that may emerge when economic conditions improve.

Segment Reviews

Carpet Business

In the six month period to 31 December 2009, our carpet business produced earnings before interest and tax of $10.1 million on revenue of $103.6 million. Earnings and revenue were down 29% and 9% respectively on the previous year.

Our carpet business comprises broadloom carpets and carpet tiles with NZ and Australia being its main markets.

Market conditions for both commercial and residential carpets were difficult throughout the period and continue to be affected by the underlying concerns associated with the global economic slowdown and financial crisis. When these concerns first emerged in the last quarter of 2008, they caused the worst turnaround in trading ever experienced by the business.

That said, our carpet business has coped remarkably well under the adverse conditions and the cost reduction programme undertaken in the previous financial year has helped to cushion the impact of the lower revenue on earnings.

We experienced slightly better trading conditions towards the latter part of this reporting period, particularly with our premium brands in Australia. However, any further improvement can only be gradual as the general market sentiment is still very fragile and volatile.

Wool Business

Our wool business comprises our 50% interest in Cavalier Wool Holdings Limited and the Elco Direct wool acquisition operation.

In April last year, we instigated a major rationalisation of the wool processing industry. This eventually led to the acquisition of the wool processing business of a competitor and the removal of approximately 77% of the industry's excess capacity. At the same time, we restructured our investment in Cavalier Wool Holdings and reduced our shareholding interest from 92.5% to 50%.

Cavalier's share of the tax paid earnings of Cavalier Wool Holdings for the six months to 31 December 2009 is $1.4 million. This is well ahead of the earnings from this business in the previous year even though it is difficult to make a meaningful comparison against the previous year because of the restructuring and the consequent dilution of our interest.

Earnings before interest and tax for Elco Direct were $270,000 for the six months to 31 December 2009 on revenue of $12.0 million, compared with a $109,000 loss before interest and tax on revenue of $11.1 million the previous year. The very significant turnaround in earnings can be attributed to the 9% increase in revenue and to lower operating costs.

Earnings Outlook

Indications are that the adverse market conditions for our carpet business have bottomed out, and we are cautiously optimistic that we will see a gradual lifting of revenue here. At the same time, our wool business is about to enter into the busy part of the season, and the volumes of wool coming onto the market and being sold are so far holding up well.

We are continuing to express our 2009/10 earnings outlook as a range and whilst we have previously indicated a range of between $13.5 million to $15.5 million, our latest assessment of our earnings after tax for the 2009/10 financial year is indicating a range of between of $14.5 million to $15.5 million. This is an improvement on the outlook provided to shareholders in the previous year's Annual Report and at the November 2009 Annual Meeting. This range represents a 6% to 13% increase on the previous year's normalised tax paid earnings of $13.7 million.

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 2010 of 4 cents per share, unchanged on the equivalent for the previous year.

This, together with the first interim dividend of 3 cents per share paid in December 2009, brings the total interim dividend (fully imputed at the rate of 0.4925) to 7 cents per share, also unchanged on the previous year's total interim dividend.

This second interim dividend will be paid on Friday, 19 March 2010. The share register will close at 5 p.m. on Friday, 5 March 2010 for the purpose of determining entitlement to the dividend and will reopen on Monday, 8 March 2010.

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

The Cavalier Corporation Limited Dividend Reinvestment Plan which allows shareholders to receive shares in the Company in lieu of dividends will apply to the second interim dividend. Shareholders wishing to participate and who have not previously notified the Company's Share Registrar must do so before 5 p.m. on Friday, 5 March 2010. A copy of the Participation Notice can be obtained from the Company's Share Registrar.

The Directors advise that the price for determining the number of shares to be issued in lieu of this dividend will be the volume weighted average sale price of all price-setting trades on the NZX over the five trading days from Monday, 8 March 2010 to Friday, 12 March 2010 without any discount.

For and on behalf of the Board of Directors,

A M James
Chairman
W K Chung
Managing Director

19 February 2010

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