Cavalier expects earnings to improve following restructuring

Cavalier Corp, the struggling New Zealand carpet maker, expects earnings to improve this financial year and next as it reaps the benefits from restructuring its manufacturing operations, a lower wool price and reducing debt.

The Auckland-based company posted a loss of $2.1 million in the 2017 financial year from a profit of $3.1 million in 2016, weighed down by a 40 percent jump in restructuring costs to $6.3 million as it shut down factories and laid off staff to consolidate operations. Stripping out one-time items such as the restructuring costs, Cavalier's normalised earnings deteriorated to a loss of $1.9 million from positive earnings of $6.3 million a year earlier.

"It has been a tough year for Cavalier," chief executive Paul Alston said in his address to shareholders at the annual meeting in Auckland today. "While the full-year result was well down on expectations, the business did achieve much in FY 2017 and it is my sincere belief that we are now on a strong course to recovery, based on the work we have done and also the opportunities and market conditions before us."

Cavalier's earnings were hurt by the restructuring of its operations in the past year, and while the process of getting its plants up to capacity was challenging, the company is now producing the required volumes and efficiency is improving, Alston said. The business was also hurt by the largest single drop in wool price in many years, which had an immediate effect on the company's scouring and wool buying operations while the benefits to its carpet making operations wouldn't flow through until the 2018 and 2019 years.

"All of these challenges hit us in a perfect storm," Alston said. "Now that the cost of the manufacturing consolidation is behind us we will work solidly to reduce debt. This will be an outcome of reducing inventory, having a lower cost of raw materials (especially wool) flowing through to cash flow and having a lean capital spend year. This will ultimately enable us to expand and grow the business," he said, noting that new products were performing well.

"We see the performance of the business steadily improving in FY18 with even greater positive impacts being realised in FY19," Alston said.

Still, chair Sarah Haydon said uncertainty remained about the company's forecasts and the board doesn't expect to be able to give meaningful earnings guidance until after the first half results at the earliest.

The company's directors recognised in the 2017 annual accounts that there was "material uncertainty" around the 2018 outcome.

"The uncertainty is around our ability to forecast the future with accuracy, not our ability to continue in business," Haydon said, noting assumptions had to be made around economic and market conditions, manufacturing performance, wool prices and sales and margins.

"Four months into the year we are making progress," she said. "A level of uncertainty in our forecast of sales and margin will however remain until we can demonstrate a track record of profitable outcomes.

"We certainly expect a better normalised earnings outcome than in FY17," she said. "As soon as we are in a position to confirm an ongoing improvement in underlying performance with our debt firmly under control, we will look to resume dividend payments."

Cavalier is in the process of refreshing its strategic plan and said it would be assessing all its non-core carpet assets and activities to ensure it has the optimum operating structure.

Alston noted that the political climate in New Zealand has changed considerably in the last few weeks with a new Labour-led government.

"We welcome a new focus on NZ jobs and retaining NZ expertise as well as the focus that 'Made in NZ' by New Zealanders is important," he said. Alston said he also welcomed the opportunity to put "quality New Zealand-made carpets" in all government controlled entities, referencing a policy campaign by Labour's coalition partner New Zealand First.

Cavalier shares last traded at 36 cents, having dropped 54 percent this year.

(BusinessDesk)