Peter Wilson Chairman

THE 2003 YEAR HAS SEEN OUR OPERATING RESULTS MEET BUDGET EXPECTATIONS, BUT MARKET CONDITIONS HAVE CAUSED A SIGNIFICANT NEGATIVE ADJUSTMENT TO THE CARRYING VALUE OF OUR FORESTS. LOWER NZ DOLLAR LOG PRICES TRANSLATE INTO LOWER FOREST VALUES AND WE, ALONG WITH ALL FOREST INVESTORS IN NEW ZEALAND, HAVE BEEN AFFECTED BY THIS VALUE ADJUSTMENT.

Operating earnings of $7.074 million are ahead of 2002 ($6.968 million),which is very much in line with our expectations. However, as advised in an April announcement to the stock exchange, the independently assessed market value of the company's forest assets has fallen from $162.4 million last year, to $141.9 million as at 30 June 2003. After accounting for this non-cash write-down and, after providing for deferred tax for the first time, the company has reported a loss of $36.484 million for the twelve month period.

New Zealand is moving towards the compulsory adoption of International Financial Reporting Standards ("IFRS "). In this regard, Evergreen has made two important accounting policy changes this year. The first of these changes is the introduction of valuation accounting rather than historical cost accounting for forestry assets. Valuation accounting has been adopted with effect from 30 June 2003 and in future, the company 's operating result will include both realised returns from the harvesting of its trees, and unrealised movements in underlying value of the company 's forests. This economic approach to earnings measurement is appropriate for a business like ours where a substantial proportion of the shareholder return within an accounting year may be represented by the unrealised value of the biological growth of the company 's forests and price driven valuation movements.

The second accounting policy change involves the recognition of the company's notional deferred taxation liability. This provision is in respect of tax payable that would crystallise in the event of a total sale of the company's forest estate. Evergreen has substantial tax losses to carry forward and combined with future costs related to the maintenance and development of our forest estate, the company is most unlikely to pay tax for the foreseeable future. The provision is required to meet the international accounting standards and there are no current plans that would see the provision crystallise. The deferred tax provision equates to approximately seven cents per share (on a fully diluted basis).

Shareholders will recall that the potential impact of of valuation accounting and deferred taxation were referred to in the 2002 Annual Report and again in the half-year report to December 2002.

INDUSTRY OUTLOOK

Industry sector results announced this year reflect the impact of a significant upward movement in the value of the New Zealand dollar, increased costs (particularly in shipping), and flat US dollar prices for products. The scale of the impact is significant.

In September 2001 the NZ dollar bought US$0.40. A year later it bought US$0.46 and in August 2003 it bought US$0.58. The general view must be that the mid rate range (US$0.50 - US$$0.55) is an appropriate level for New Zealand exporters to base their investment strategies upon. There are financial hedging arrangements that provide some protection from currency movements but business success must be measured on the underlying margins generated from trading.

Trading operations in any sector are unlikely to be able to cope with a 50% volatility against their major trading currency and maintain profitability at target levels for an extended period.

Stumpage realisations since July 2002 have fallen by as much as 60% due to currency movements and increased shipping costs (see table).

ILLUSTRATION OF IMPACT ON RETURNS

GOVERNMENT

Last year I referred to Evergreen ’s view on the Kyoto Protocol and the pending nationalisation of carbon credit rights held by property owners. Nothing has happened in this last year to reduce those concerns. The forestry industry is a major contributor to this country’s economy. The effective confiscation of carbon sequestration credits, delays in dealing with transportation and infrastructure issues, and perceived regulatory barriers to investment in New Zealand-domiciled processing, are issues that demand a high level of industry and Government attention.

These are not easy problems to resolve but if you believe as I do, that agri-based industries will continue to be the driver of New Zealand ’s economic wealth, then some priority needs to be directed to assisting rather than inhibiting our key industries.

We are seeing the consequences of difficult times and I believe the industry is working hard to minimise the impact. There needs to be a higher level of understanding of what is needed to be done and what it is that Government can and should do to assist in creating a positive climate for business development.

INVESTMENTS

This year $8.5 million has been spent on development forests (including interest costs) with much of this investment made in our East Coast forests. Our policy of investing to optimise pruned wood production continues on favoured sites and we are satisfied that all our forests are in good health and meeting targeted growth rates.

We have evaluated a number of modest sized forest opportunities but have not made any acquisitions.

FUNDING

We concluded a 10 year US dollar denominated facility with the Boston-based John Hancock Life Insurance in February.This loan refinances the facility provided by Carter Holt Harvey on our purchase of the Waiau and Wairoa forests in 1999.The facility carries an interest rate of 6.88%and the loan meets our objectives to obtain longer-term facilities while providing a modest portion of our debt with exposure to the US dollar.

We have also extended our banking arrangements with Westpac Banking Corporation to a five-year term. These facility changes allow us to better align our expected crop maturity with our debt obligations.

The impact of negative forest value changes does result in debt levels that are higher than your Board considers appropriate for the longer term. Consideration is being given to strategies to improve the debt ratio.The further conversion of 2.732 million convertible notes in February 2003 has reduced debt and increased equity.

LONGER TERM INDUSTRY OUTLOOK

The last year has again shown us the extent to which we in New Zealand are dependent on the health of the major developed economies. With much of our trade in US dollars, any significant movement in the US economy has a profound effect on our export industries. That is particularly so in the forestry sector where the Chinese currency is linked to the US dollar and trade with most Pacific-rim countries is denominated in the same currency. Diversification of markets and of products, and increasing acceptance of the special qualities and versatility of New Zealand plantation-grown timber are clearly important strategies. The challenge is to be able to attract additional investment in processing in New Zealand. The increasing maturity of forests in regions such as Gisborne and Northland do provide a resource base for further processing investment.

The desirability of investment in renewable resources that are produced in an environmentally friendly manner seems to be widely accepted. However, this has not provided any recognition by way of demand or price premium, as yet. Certification of forests as sustainably managed, combined with a focus on high standards of service and consistent quality, are helping the industry, as is the New Zealand reputation and experience as plantation foresters.

What is needed is evidence of the cessation of indigenous harvesting. That will be the driver of improved demand for plantation grown timber and while it is absolutely certain that demand will emerge, the question remains -when.

Evergreen has always asserted that investment in this sector is long term. We anticipated our operating cash flows would progressively increase as harvest availability improved and our view, and that of our independent valuers, has been that prices would trend upwards. We still hold that view but acknowledge that the upward momentum has yet to emerge in the marketplace.

It may be that the structure for forest ownership needs to have greater flexibility to be able to reduce harvest in low price cycles. Evergreen has this flexibility and plans to moderate harvest this year. Flexibility may be enhanced through scale that enables higher levels of management efficiency and lower debt levels.

Evergreen needs to manage the longer than planned period before price improvements are obtained, and in so doing,address administrative costs and ways in which debt ratios may be reduced.

Unlike the Asian downturn in 1998, short-term prospects are more likely to improve through our currency returning to mid point levels and a return to more
competitive shipping rates. The anticipated lift in the US economy will probably be the driver of improved product prices.

Evergreen expects both to be evident in the second quarter of 2004.

EVERGREEN PRIORITIES

1)	In the last 6 months your Directors have undertaken a review of process and organisational efficiency. We conclude that:

• The marketing subsidiary, Forestry New Zealand Limited,is achieving very good margins from the company’s harvest volume in the current market and adding value through co-ordination of shipping and third party purchasing of logs. The cost of this in-house service is in line with external costs and we enjoy the benefits of a team focused on Evergreen’s production.
  
  
• The management of Evergreen ’s pure play forest ownership function remains appropriately small and we see no need to change this approach.
  
  
• There is some added cost arising from the listed nature of the company. These costs would be relatively lower should the company achieve greater scale and if that scale is not realised then the costs associated with listing must be reviewed.
  

ACKNOWLEDGEMENT

The demands of this industry have required considerable effort and the commitment and determination of the Evergreen team has been of a high standard.

Peter Wilson
CHAIRMAN
20 September 2003

Return to Annual Reports