Cavalier's annual profit falls 13%, signals "modest increase" in 2015 earnings

Cavalier Corp [NZX: CAV], the listed carpet maker, posted a 13 percent drop in earnings last year, as a high currency crimped export sales and margins were squeezed by rising wool prices and increased rivalry.

Profit fell to $5.8 million in the 12 months to June 30, from $6.6 million the year earlier which excluded $3.6 million of restructuring costs, the Auckland-based company said in a statement. In June the company flagged a profit range of between $5 million and $6 million, down from its previous guidance. Revenue fell 1 percent to $201 million.

Cavalier has restructured its businesses and introduced a synthetic carpet range as it battles to retain market share against increased competition from cheaper synthetic imports, while margins are squeezed by a rising wool prices and lower sheep numbers and export earnings are crimped by a strong New Zealand dollar. The company said today it is forecasting only a "modest increase" in earnings for the coming 2015 financial year.

"Upsides include a full year's benefits from the consolidation of tufting which we completed in 2014, continuing growth in synthetic and felted carpet sales, launch of new products that had been scheduled for 2015, growth in rest of world markets and lift in wool grease prices," managing director Colin McKenzie said in the statement. "Downsides include the impact of continuing increase in wool price on woollen carpet margins, continuing soft market conditions in Australia for both residential and commercial carpets and continuing strong New Zealand dollar adversely affecting the conversion of our Australian dollar-denominated sales into New Zealand dollars."

Cavalier's board decided not to pay a final dividend, citing its recent earnings downgrades and the company's requirements for cash flow and capital. It paid a 3 cent dividend in the first half of the financial year. The board will keep the dividend policy under review and update shareholders at its annual meeting on Nov. 25, it said. It also plans to provide an indication of the full year outlook at the meeting.

Cavalier's carpet revenue slipped 3 percent to $163.6 million on flat volumes as a stronger New Zealand dollar crimped Australian sales. Earnings at the unit rose 31 percent to $8.4 million, excluding $5 million of restructuring costs the year earlier, as a result of efficiency gains from the consolidation of tufting during the year, the company said. Staff employed by the carpet unit fell to 643 from 678 a year earlier.

While it recorded a pick up in the New Zealand market, with increased sales, margins and profits, the lower-priced segment of the market "remains very competitive," Cavalier said. Volumes of its synthetic Habitat Collection carpets exceed expectations and growth in high-end felted wool carpets were encouraging off a small base, it said.

In Australia, the weaker economy kept volumes and margins under pressure amid intense price-based rivalry although volumes of its Habitat synthetic range were above its intial targets, it said. The stronger New Zealand dollar weighed on Australian revenue and margins as did stock clearance activity as the company reduced its portfolio of products.

The company's wool business, which includes wool buyer Elco Direct and a half share in wool scourer CWH, increased revenue 22 percent to $42.3 million, while earnings slipped 0.8 percent to $1.4 million. Staff numbers fell to 26 from 34 a year earlier. CWH was impacted by a "dramatic reduction" in the wool grease price, which has fallen by almost 61 percent since the beginning of 2013, as demand dropped due to a disease affecting the Asian shrimp industry, where wool grease is used in the manufacture of shrimp feed.

"With the disease now under control, demand is anticipated to recover, and we are expecting wool grease price to gradually increase in the next financial year," McKenzie said.

The wool business was also hurt by a drop in the volume of wool available for scouring as sheep numbers decline. Cavalier is committed to further rationalisation for the industry to ensure wool scouring in New Zealand remains competitive, McKenzie said.

The company said its Radford Yarn Technologies business benefited from increased demand for felted yarns as Cavalier seeks to boost sales of those products.

Shares of Cavalier last traded at $1.03, and have declined 40 percent this year.

(BusinessDesk)