Fletcher Challenge Forests Results

RESULTS ANNOUNCEMENT AND OPERATING REVIEW
SIX MONTHS ENDED 31 DECEMBER 2000

Results Overview

„h Net earnings before unusual items of $1 million, compared to $4 million in December 1999.
„h Net unusual losses of $499 million, including a $529 million write down of our investment in the Central North Island Forest Partnership.
„h Operating revenue of $348 million ¡V a record for a six-month period.
„h Cash flow from operations of $66 million, before separation charges, compared to $61 million in December 1999.
„h Awarded Forest Stewardship Council (FSC) environmental accreditation for our New Zealand forest estate management.
„h Raised $414 million in new equity in preparation for the proposed separation of the Fletcher Challenge Group.

Results (NZ$ million)
Six months to: December 2000 June 2000 December 1999
Operating Revenue 348 321 302
Operating Earnings/(Loss) (EBIT) (565) 37 40
Operating Earnings Excluding Unusuals 38 41 29
Net Earnings/(Loss) (498) 66 15
Net Earnings Excluding Unusuals 1 19 4
Cash Flow from Operations Excluding Unusuals 66 66 61

2001 Interim Dividend
There is no 2001 interim dividend for Fletcher Challenge Forests Shareholders.

Stock Exchange Listings: New Zealand Australia New York
Ordinary FFS FLCFS FFS
Preference FFSPA FLCFP FFS.A

Details on Fletcher Challenge Forests and its operations for the six months ended 31 December 2000 can be viewed on the website at: www.fcf.co.nz

Information on the financial performance and position of the Fletcher Challenge Group (including the Financial Statements) is contained in the Fletcher Challenge Group Results Announcement.

Forward Looking Statements: Comments in the Outlook section, about anticipated market conditions and activities, are forward-looking and are made pursuant to the safe harbour provisions of the US Private Securities Litigation Reform Act of 1995. Refer to page 6 of the Fletcher Challenge Forests 2000/01 Interim Annual Review for an explanation of the factors that could cause actual results to differ materially from those expressed.
Results Summary

The operating results for the six months to 31 December 2000 reflect a continuation of difficult trading conditions in most markets. Earnings before interest and tax (EBIT), excluding unusual items, were $38 million compared to $41 million in the previous six months and $29 million in the comparative six month period. Reduced demand for construction products in New Zealand and lower harvest volumes from our own forest estate had a negative impact this period, offset by exchange rate gains on sales to the United States and to Asia.

The financial results for the period, with a net loss of $498 million being recorded, compared to net earnings of $66 million for the previous six months and $15 million in the comparative period, were dominated by unusual items.

Unusual items totalled a net loss of $499 million, comprising a write down of $529 million ($574 million before tax) for any shortfall in the realisable value of our investment in the Central North Island Forest Partnership (the Partnership) in the event of a sale, $19 million of separation costs, and a provision of $5 million established for the legal costs of defending the claim by CITIC New Zealand Limited (CITIC), partially offset by a gain of $54 million arising from the purchase at fair value of tax benefits previously attributed to Fletcher Challenge Paper. Unusual items (after tax) totalled gains of $47 million in the previous six months and $11 million in the comparative period.

The current period result includes a net after tax operating loss of $15 million from Fletcher Challenge Forests¡¦ equity interest in the Partnership compared to an $8 million loss in the previous six months, and a $14 million loss in the comparative period. Equity accounting for this investment ceased from 1 January 2001 following its change in status, as explained further on.

Cash flow from operations (prior to cash separation charges of $21 million) was $66 million for the six months to December. This compares with $66 million for the previous six months and $61 million for the comparative period.

In December 2000 Fletcher Challenge Forests completed a major equity raising as part of a financial restructuring prior to the proposed separation of the Fletcher Challenge Group. The net proceeds of $414 million have significantly reduced the level of debt.

Review of Trading

Operating revenue of $348 million was up 8% on the previous six months, and up 15% on the comparative period.

Our manufacturing operations performed well despite the low demand in the key New Zealand residential construction market (new dwelling consents down 30% compared to the same period last year) and the sharp drop in Australian housing approvals (down 42%). Steady volume and higher NZ dollar (NZD) prices on sales into the US, coupled with an increase in sales of higher value products, lifted Processing and Distribution revenue to $164 million, up 13% compared to the previous six months. Sales volumes increased by 5%.

Sales to North America rose 43% to $67 million compared to the previous six months, and represented 41% of manufactured product sales. Although prices in the US remained low throughout the period, steady demand for our premium product lines (clear mouldings, lumber and boards), new product categories and the fall in the NZD, all contributed to the increase.

New Zealand is still the major market for manufactured products at $71 million or 43% of sales. This was in line with the $71 million achieved in the previous six months, but down on the $78 million of sales in the comparative period when housing construction was running at strong levels. This was a satisfactory result considering the decline in demand, and shows the benefit of a broader distribution base and the success of some niche products (vineyard posts, Origin I-beam).

Manufactured product sales volumes from the Fletcher Challenge Forests¡¦ consolidated operations increased 5% to 304,000 cubic metres compared with 289,000 cubic metres in the previous six months. Of this total, the higher value remanufactured products, such as finished mouldings and laminated posts, comprised 18% or 54,000 cubic metres, up from 15% in the previous six months.

Revenue from New Zealand Forests rose 5% to $184 million compared to the previous six months. An 8% increase in the volume of sales from our third party trading activities was the main driver together with higher average prices, which more than offset the effect of a 16% decline in the volume from our own forests.

Demand in the export markets has been mixed, with steady buying from Japan but soft demand from SE Asia where sales are still well below levels prior to the Asian downturn of 1998. There is sufficient volume available from New Zealand, Chile and Russia in particular at current levels of demand, and US dollar (USD) export log prices remain close to historical lows. Net USD prices for the indicator grades for Asian log demand ¡V A grade to Japan and K grade to Korea ¡V were down on the previous six months (by 1% and 9% respectively). Prices in NZD however benefited from a fall in the exchange rate (against the USD), which averaged 14% lower than the previous six months.

New Zealand Forests¡¦ revenue also includes $26 million in accrued interest income on loans to the Partnership, compared with $23 million in the previous six months. As from 1 January 2001, interest on loans to the Partnership ceased to be recognised as income.

Revenue from the Partnership (which is not consolidated) was $229 million, an increase of 6% over the previous six months. Log sales volumes increased 4% over the previous six months but were down 20% on the comparative period in 1999. Manufactured product sales were down 2% over the previous six months.

Operating Earnings

Operating earnings before interest, tax, depreciation and depletions (EBITD), excluding unusual items, were $71 million compared to $77 million in the previous six months and $61 million for the same period last year.

Processing and Distribution EBITD fell slightly from $19 million in the previous six months to $18 million. Higher log costs were the main influence as the improving NZD returns for log exporters flowed through to higher domestic log prices. Log purchases comprise over 60% of the total processing costs.

EBITD excluding unusual items for New Zealand Forests was $53 million, down 9% on the previous six months, but a 29% improvement over the previous comparative period. The impact of lower sales volumes from our own estate was offset by improved prices in NZD terms.

Operating earnings before interest and tax (EBIT) for Processing and Distribution fell $3 million on the previous six months to $12 million, while New Zealand Forests, excluding unusual items, was unchanged at $26 million.

Financial Condition

The net proceeds of $414 million raised through the Rights Offer of new preference shares in December 2000 has reduced net debt to $501 million as at 31 December 2000. This represents a 25.4% debt-to-capitalisation ratio based on book values following the write down of the Partnership investment.

Investing and operating cash outflow for the period was $69 million. This comprised $66 million of cash flow from operations less cash separation charges of $21 million and an adverse working capital movement of $54 million (including $26 million of accrued interest income).

Capitalised forest maintenance and interest costs were $43 million compared to $38 million in the previous six months.

The purchase of plant and equipment totalled $8 million, down on the $20 million in the previous six months due to the completion of some one-off improvement initiatives and also tighter restrictions on capital expenditure.

Central North Island Forest Partnership

Primarily as a result of current low log prices, the Partnership breached certain loan ratios and covenants at 31 December 2000, and the senior bank debt facility is now in default. On 26 February 2001 the Board of Fletcher Challenge Limited announced that the banks financing the Central North Island Forest Partnership (the Partnership) had appointed Mr Michael Stiassny and Mr Grant Graham of Ferrier Hodgson as Receivers for the assets. Fletcher Challenge Forests will continue as interim manager of the Partnership business, under the Receivers' direction.

In the six months to December 2000 Fletcher Challenge Forests wrote down the accounting carrying value of its holding in the Partnership to US$225 million. All Fletcher Challenge Forests' equity in the Partnership has been written off, and the remaining value is represented exclusively by subordinated debt principal and net accrued interest of US$225 million (NZ$510 million). The investment is secured over the assets of the Partnership, ranking behind approximately US$640 million of senior bank debt.

CITIC Litigation

CITIC, the Fletcher Challenge Group¡¦s 50% partner in the Partnership, has made significant claims against Fletcher Challenge Forests in connection with the Partnership, not all of which have been formally quantified. The claims relate to a number of issues in connection with the management of the Partnership and to the valuation of the assets purchased by CITIC from the Group upon the establishment of the Partnership. CITIC is also seeking the termination of the management contract held by Fletcher Challenge Forests. In the view of Fletcher Challenge Forests these claims are substantially without merit and will be vigorously defended. A provision of $5 million was established at 31 December 2000 to cover the costs of that defence.

Dividend

Wood product prices within the wider Asian region are still below long-term levels, and this situation continues to have a significant negative impact on cash flow. Therefore, no dividend has been declared for the half year to December 2000.

FSC Accreditation

In October 2000 Fletcher Challenge Forests was granted Forest Stewardship Council (FSC) accreditation for our New Zealand forest estate management.

Obtaining this independent evaluation of our forestry practices has provided international endorsement that our forests are ¡§well-managed¡¨, in accordance with the FSC¡¦s ecological, economic and social standards. FSC certification will provide a significant marketing opportunity in those markets which differentiate products sourced from sustainable resources.

Outlook

Building activity in New Zealand is likely to remain in the lower half of the cycle for the coming year, especially in the residential sector. The latest house construction statistics show that demand has not stabilised, and there may be further flow-on impacts from the decline in Australian demand. Conversely, interest rates are reasonably stable despite some imported inflationary pressure.

The United States economy is going through a slow down which could have some effect on the repair and remodelling sector, and our key customers are reporting declining sales. In addition, the NZD is likely to be stronger in the coming six months. However we do not expect any significant drop in demand, and the USD prices are showing some signs of improving as balance is restored to US domestic lumber production.

Asian demand remains volatile, and is currently too low to create upward pressure on prices. Therefore, it will be our ongoing efforts to grow the demand for environmentally certified Radiata pine products, in both existing and emerging markets, that will be the key to earnings improvement in the near-term.

Terry McFadgen
Chief Executive

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