| |
Report
to Shareholders for the Period Ended 31 December 2003
Evergreen Forests
Limited incurred a net loss after tax of $13.151 million for the six months
ended December 2003 (December 2002 profit $4.270m). The loss incorporates
the forest value write-down ($13.162m post tax) announced in December
2003, as forest are now accounted for at valuation and all forest value
movements are recorded through the Statement of Financial Performance.
In addition, the previous accounting policy (historical cost) required
the capitalisation of some interest and silviculture expenses that are
now expensed under valuation accounting. Therefore the result cannot be
directly compared to that the same period last year.
OPERATIONS
Market conditions were challenging during this period. From 2003 to December
2003, the NZ dollar appreciated 12% against the US dollar and shipping
costs increased by over 50%. Log prices in US dollars increased, but as
the following table shows, the NZ dollar returns are still below those
prevailing 18 months
IMPACT OF EXCHANGE
RATE AND SHIPPING COSTS ON MARGINS
(Illustrative example for high value export log grades using typical NZD
costs)
| LOG
GRADE |
PRUNED
|
A
GRADE
|
| PERIOD |
JUN
02
|
JUN
03
|
DEC
03
|
JUN
02
|
JUN
03
|
DEC
03
|
| USD
Log Price ($/m3) |
$107
|
$107
|
$135
|
$66
|
$67
|
$103
|
| USD
Shipping ($/m3) |
$19
|
$26
|
$40
|
$19
|
$26
|
$40
|
| Exchange
Rate (NZD/USD) |
0.486
|
0.583
|
0.654
|
0.486
|
0.583
|
0.654
|
| NZD
FOB ($/m3) |
$181
|
$139
|
$145
|
$97
|
$70
|
$96
|
| NZD
Costs ($/m3) |
$60
|
$60
|
$60
|
$50
|
$50
|
$50
|
| Net
Margin ($/m3) |
$121
|
$79
|
$85
|
$47
|
$20
|
$46
|
| Source:
Evergreen Forests Limited. |
In response to these
market conditions, the company reduced harvest from owned forests as foreshadowed
in the June 2003 report to shareholders. The total harvest from the Evergreen
estate for this period was 115,279m 3, some 28% lower than the previous
corresponding period (160,270m 3). In addition to the lower volume, the
log mix was quite different, with a higher proportion of sawlogs (+7%)
and a lower proportion of pruned logs (-7%). Consequently, sales revenue
from the Evergreen estate was lower at $11.358m (2002: $19.042m). Offsetting
third party sales increased to $3.698m (2002: $0.831m) due to higher trading
activity in our harvesting and marketing subsidiary, Forestry New Zealand.
FOREST VALUATION
It is disappointing to report a further reduction in the value of the
company’s forest estate to $118.7m (June 2003: $141.9m). This is
in line with reductions reported by the major forestry companies. Recent
market transactions and difficult trading continue to impact on forest
values.
Jaakko Pöyry Consulting (“JPC”) were engaged by the Board
to assess Evergreen’s forest value as at 31 December 2003. JPC applied
an increased discount rate (from 9% to 10%) and slightly lower log price
assumptions than those employed in previous valuations. The principal
cause of the reduced forest value was the increase in the discount rate.
During the period, Evergreen sold a small forest in Clevedon, Auckland
that had been identified as suitable for sale due to its semi-urban location
and relatively high underlying land value. The company recorded a small
profit on the sale of this asset. Sale proceeds will be applied to debt
reduction.
OUTLOOK
Some tension has emerged in export markets as New Zealand producers reduce
their harvest and lower export volumes, This has resulted in an improvement
in US dollar log prices, but as previously shown, the continued escalation
in shipping prices and the strength of the NZ dollar has overwhelmed the
US dollar price increases resulting in much lower NZ dollar stumpage values.
Domestic markets remain
mixed with good demand from structural mills for unpruned sawlogs. However,
domestic pruned log prices have come under pressure as the local mills
processing these logs have faced lower prices for their products.
Evergreen is planning to increase its production in targeted areas to
take advantage of recent price improvements of export sawlog grades. Total
harvest volume for the year should be similar to the prices last financial
year.
NZ EXTERNAL REVIEW
As indicated by the Chairman at the 2003 AGM and again in the market announcement
on 19 February, the Board considered the impact of recent asset valuations
to be material for the Company and that it was proper to review how best
the economic circumstances could be managed.
Hence, the Board commissioned
an independent consultant to review and report on the company’s strategy,
operations and asset quality. This report has now been received and carefully
considered by the Board. It confirms that given the maturity profile and
location of our forests, deliberate action should be taken to manage the
company through what may be an extended cycle low NZ dollar log prices
in order to preserve shareholder value and to position the company for
the future.
As a result, several important decisions have been taken. First Evergreen
Forests will cease pursuing a growth strategy and for the foreseeable
future will concentrate on its existing asset base.
Secondly, as an immediate step, we are aggressively reducing both administrative
and operational costs. This is likely to entail changes to our management
structure, office location and silvicultural policies.
Thirdly, in order to further strengthen our balance sheet and manage possible
fluctuations in forest values, we will also consider, amongst other things,
further asset sales with the proceeds being used to retire debt.
This will be a staged
process, but one actively pursued in the months ahead.
|
Peter D. Wilson
Chairman
|
Mark S. Bogle
Chief Executive |
Return
to Annual Reports
|
|
Peter Wilson
Chairman
Mark Bogle
Chief Executive
|
