Directors'' Report
For the six months ended 31 December 2016
The half-year results reported today are in line with what the Directors
expected when they recently announced that the normalised profit after tax
for the 2016/17 year is forecast to be close to break-even.
FINANCIAL PERFORMANCE
Consolidated Income Statement
Six months ended 31 December
Unaudited
(figures in 000''s for six months ended 31 December 2016 and 31 December 2015)
Revenue $84,278; $98,422
EBIT (Normalised) (1) (1,183); 4,268
Net interest expense (1,489); (1,961)
Share of equity-accounted investee profit (Normalised after tax) (1) 88; 985
Profit/(Loss) before tax (Normalised) (1) (2,584); 3,292
Income tax 708; (876)
Profit/(Loss) after tax (Normalised) (1) (1,876); 2,416
Restructuring costs (1,833); (936)
Net gain on merger of equity-accounted investee 3,740; 0
Gain on disposal of property, plant and equipment 0; 2,035
Profit after tax (GAAP) $31; $3,515
Earnings per share (cents) (Normalised) (1) (2.7); 3.5
Earnings per share (cents) (GAAP) 0.0; 5.1
(1) Normalised is a non-GAAP (Generally Accepted Accounting Practice) measure
that provides what the Directors believe to be a more meaningful view of the
underlying financial performance of the Group. A reconciliation between GAAP
and normalised earnings together with further commentary on the disclosure of
non-GAAP financial information are attached.
Last year''s focus was debt reduction, inventory rationalisation and the
restructuring of administration and sales functions. Our focus in recent
months has been significant investment in the core business by consolidating
manufacturing activities and re-invigorating the Cavalier Bremworth brand.
The short term cost of these essential reinvestment activities has impacted
the current half year results, however they will progressively and
significantly benefit the Company going forward. Other market factors such as
increased wool price and the stronger USD have also adversely impacted the
first half results.
The Group reports a break-even position for the half year (compared with
$3.5m in 2015/16). Adjusting for the abnormal gain from the scour merger of
$3.7m and transitional costs relating to the consolidation of Cavalier''s wool
spinning operation of $1.8m, the normalised loss for the first six months is
$1.9m compared with a normalised gain of $2.4m last financial year.
FINANCIAL POSITION
The increase in net bank debt of $5.9m since the year-end reflects $6.0m of
restructuring costs and $2.1m capital gains tax payment resulting from the
sale of the Sydney warehouse in the last financial year. With these large
one-off costs now behind us, debt will once again start to fall. In January,
the Company received a dividend of $3.25m from Cavalier Wool Holdings Ltd
(CWH) as a result of the scour merger, which has reduced debt.
In the last six months, management has improved the Company''s inventory
profile and reduced inventory by $8.5m. This has been achieved while it was
also manufacturing the additional inventory required to support new products
in the market.
Total assets and equity have remained in line with previous year-end.
CASH FLOWS
Net cash outflows from operations were $4.8m for the first six months,
reflecting the large costs associated with the consolidation of manufacturing
and the capital gains tax payment referred to above.
SEGMENT REVIEWS
Carpet Business
The sale of the Ontera carpet tile business in 2015/16 and the associated
carpet tile revenue forgone is the main driver of the fall in revenue.
The NZ market has remained reasonably buoyant, however Australia has been
much softer than anticipated particularly in the last two months. We are
working hard with our retailers to stimulate sales.
We have now closed our Christchurch plant and moved the felting operation to
Wanganui. Woollen yarn spinning is now conducted entirely out of the Napier
plant. We acknowledge the management and staff of these operations for making
this happen.
The carpet segment result for the first six months has been affected by a
number of factors including:
o Significant restructuring costs associated with the consolidation of
spinning operations;
o Higher wool price compared with the previous year;
o Higher USD impacting negatively on cost of synthetic yarn purchases; and
o Increased marketing costs in respect of the new Cavalier Bremworth World of
Difference marketing campaign.
All of the above factors that have negatively impacted the six months (and
the full year forecast) will either not repeat or have turned in our favour,
with the benefits to come through in 2017/18.The significant gains from
consolidating our manufacturing operations will also be progressively
realised in the 2017/18 year.
Because there is about a six month lag between the purchase of wool and the
manufacture and sale of carpet, we will not see the benefit from the current
drop in wool price until 2017/18. Conversely, the high wool price that
prevailed in the previous year is adversely impacting current profitability.
Wool Business
Our wool business comprises our wool buying operation, Elco Direct, and a
27.5% interest in the enlarged CWH wool scouring business post its merger
with the wool scouring operations of New Zealand Wool Services International
Ltd (NZWSI). This is to be compared with the 50% we held previously in a
smaller pre-merger entity.
This year, both our wool-related businesses have been adversely impacted by
the dramatic drop in wool price which has caught many in the industry by
surprise and is due almost entirely to a lack of demand out of China.
Elco Direct, like many wool traders and exporters, had to exit stocks in a
falling market and this impacted negatively on margins. The current price of
wool is very low and growers are reluctant to sell at these levels. As a
result, the flow of wool has abated significantly, with a high percentage of
wool passed in at auction. Elco Direct has had three very strong years, but
profits are down in the last six months reflecting the current challenging
operating environment. Once demand returns and wool price stabilises, Elco
Direct will be in a better position to buy and sell wool at a consistent
margin.
After over two years of Court proceedings, the merger of CWH with the wool
scouring operations of NZWSI was finally approved by the Court of Appeal in
December. The purpose of the merger is to safeguard the wool scouring
industry in New Zealand and our reduced share in a much bigger entity will be
beneficial for the Company in the long term.
For the first six months, volume through the scour is considerably down on
that for the same period last year. The total wool clip has not changed
dramatically, but at current low prices, growers and exporters are holding
off committing to selling and scouring wool. We are confident that the wool
will eventually come on to market and be scoured once pricing and demand
settle at their new levels.
The consolidation of the scouring businesses is expected to take a year to
complete. In the short term, CWH will experience some inefficiencies while
equipment is being moved and reconfigured.
EARNINGS OUTLOOK
The Directors reiterate that their forecast for 2016/17 remains unchanged. We
expect the result for 2016/17 to be close to breakeven on a normalised
tax-paid basis.
2016/17 is a year of investment in the long term future of the Company, and
we remain confident that the benefits of the work done this year together
with changes in the macro environment will flow through into improved
results.
DIVIDENDS
The Directors have previously advised that as soon as we are in a position to
confirm an ongoing improvement in underlying performance and we have our debt
firmly under control, we will resume dividend payments. While good progress
has been made, we are not there yet. The NZD:AUD exchange rate and the
weakness in the Australian economy remain a concern to Cavalier as an
exporter. As a consequence, no dividend is being paid at this time.
S E F Haydon, Director
S R Bootten, Director
For more information regarding this announcement, please contact Paul Alston,
Chief Executive Officer, on 021 918 033 or 09 277 1135.
End CA:00296937 For:CAV Type:HALFYR Time:2017-02-17 09:35:41