Price, volume increases needed to meet bank covenants

Cavalier says price, volume increases needed to meet bank covenants

By Rebecca Howard

Aug. 27 (BusinessDesk) - Cavalier Corp says the business is at risk of breaching its banking covenants if it can't sell more carpet this year or achieve higher prices.

The firm, which today confirmed a $16.8 million net loss after $6.8 million of write-downs, said conditions remain "challenging" but it believes it remains a going concern and can meet its contractual obligations.

"This going concern relies on future forecasts which are sensitive to sales volumes and margins and subject to material uncertainty if these forecasts are not met," the board said

In its financial statements, the board notes the company is assuming an increase in carpet sales volumes and woolen carpet pricing for 9 percent and 4 percent respectively in the current financial year. It also expects a wool price - scoured and delivered - of $4.08 per kilo.

"Keeping all other assumptions constant, the group would likely breach its financial covenants if the group was unable to achieve an increase in sales volumes of 4 percent or, alternatively, an increase in sales price compared with the financial year ended June 30," it said.

A decrease in sales volumes by 7 percent and failing to achieve a sales price increase would likely result in the group ceasing to generate positive cash flow from operations. Hence the material uncertainty.

"Should the group not achieve its financial forecasts and meet its debt obligations, the group may not be able to continue as a growing concern," it said.

The Auckland-based company confirmed normalised net profit of $1.9 million, in line with guidance provided last week. The $16.8 million loss also included an $11.9 million loss on the sale of its wool scouring business.

Revenue fell 9 percent to $135.2 million, due to soft demand in Australia and softer demand in New Zealand late in the second half.

Cavalier said sales of low-margin synthetic carpets are declinining, impacting the firm's volumes and margins.

"High-end wool carpet sales are increasing, albeit volumes are small," the company said in a presentation.

Cavalier said management and the board continue to work hard to drive efficiencies and lift sales, with a number of initiatives in place to support its wool focus.

Late last week cavalier announced a "collaboration" with the New Zealand Merino company as it looks to cash in on a growing consumer trend toward natural fibres and away from synthetics. Chief executive Paul Alston said NZ Merino wasn't buying a stake in Cavalier but would supply them with wool and use their expertise to help market and promote the benefits of wool.

Today it said other initiatives include plans to grow carpet sales by focusing on in-store presence, improving the firm's supply chains, and on-going product development and range refreshment. The company is also working to reduce the cost base and has created a board sub-committee to oversee implementation of the strategy to growth carpet sales.

Cavalier observed that it holds about $30 million of property and has bank debt of about $18 million.

It noted the Aug. 7 valuation of the group's Auckland property and said the "fair value of the property on commercial sale and leaseback terms would be sufficient to settle the group's debt facility should the need arise."

The shares lifted 1.7 percent to 30.5 cents and are down 45 percent so far this year.

(BusinessDesk)

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