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Feltex announce profit downgrade, chief executive to step down

Media release

Monday 20th June 2005

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The chief executive of Feltex, Sam Magill, is to step down later this year and a full review of the company's operations is underway, following an announcement to the Stock Exchange today that the final profit for the year is anticipated to be lower than the April Earnings Guidance.

The Board has issued a revised Earning Guidance that the net profit after tax (NPAT) for the 2005 financial year will be between $11.5 million and $12.0 million before any restructuring costs. This compares with the April 2005 Earnings Guidance of $15 million to $16 million.

All of the annual profit will have been earned in the first six months of the financial year. The second six month's earnings for the year (January to June) will be flat. Fourth quarter earnings are projected to be between $200,000 and $700,000 prior to restructuring costs arising from initiatives taken to address increasing competitive pressures, compared to the third quarter loss of $880,000. This is a small turnaround, but not to the level that was expected in April.

"The Board and I are only too aware that this announcement will be a disappointment to investors. We are unhappy with the company's performance and are taking a number of measures to address it," chairman Tim Saunders said.

"The poor second half performance will also mean that, while an interim dividend of 6 cents was paid in April, there will be no final dividend," he said.

"International trading conditions are becoming more competitive. We are taking broad-reaching actions to maintain and improve our profitability. The initiatives we are undertaking are intended to have a positive effect on the underlying profitability of the company."

Magill will step down following the AGM at the end of the year. A search for his successor is underway.

"Mr Magill led the merger of Feltex and Shaw Industries to create the Australasian wide business we currently have, and led the company into public ownership. He is highly respected in the Australasian carpet industry for his achievements," said Saunders.

The Board has signaled that Magill's replacement will be an external appointment. A review of the senior management structure and team of the company is also underway.

The last full review of the operations of Feltex was in 2001 when there was rationalisation of plant between New Zealand and Australia following the merger with Shaw Industries.

"We are looking at cost structures, the location of plant, and overall production capacity. This process commenced in April," said Saunders.

"To succeed in its priority of restoring shareholder value, the company must continue with its market-focused strategies and must become more flexible and innovative with production," said Saunders.

"The Board remains committed to its marketing strategy of increasing sales in the premium and mid-value segments of the market. The proportion of the company's sales in the premium and mid-value residential segments has increased this year, assisted by new product lines.

Saunders said that a number of factors have contributed to the revised forecast by the company and the wide-ranging review, noting that Feltex operates in markets that are very sensitive to consumer demand.

"There are external factors that are putting pressure on the company's ability to maintain and improve average selling prices and margins. Competitive conditions in Australia, which represents 75% of the company's sales, have continued to deteriorate. Since March, market conditions in Australia have tightened further. Average selling prices and margins for the fourth quarter are likely to be lower in Australia than were anticipated in the April Earnings Guidance. At the same time, market conditions in the New Zealand residential market have started to soften. The commercial market is tight, but steady in both countries.

"The continuing strong NZ and Australian currencies against the US currency have resulted in imported carpet becoming more competitive against locally manufactured carpet. The market share of imports in Australasia has risen from 14.5% to 17% for the 12 months to 31 March 2005.

"This factor, plus the depressed consumer demand in Australia, the softening of demand in New Zealand, and the uncertainty around market recovery highlights the need for the full review of operations."

Saunders also noted that Feltex was in discussions with several candidates to fill the Board vacancy left by Joan Withers. The Board accepted the resignation of Withers from the Board following her appointment as the New Zealand ceo of Fairfax. He noted Wither's excellent contribution to the Board.

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