Fletcher Challenge Forests "Clear Decks" With Major Financial Adjustments
Fletcher Challenge Forests today posted a loss of $749 million, dominated by unusual items totalling $746 million. The major component of this loss, the write-down of the investment in the Central North Island Forest Partnership (CNIFP), has previously been advised to the market.
In addition to the impacts of the CNIFP receivership, the unusual items related to changes in the valuation of the company's forest estate resulting from a new accounting approach, and a number of items relating to the Fletcher Challenge Group separation process.
Chairman Sir Dryden Spring emphasised that these adjustments provided the company with a strong platform from which to realise its true potential, and that the new Board and management were determined to lift returns to shareholders to levels commensurate with the funds employed.
Sir Dryden said that with the issues of the separation and consequent financial adjustments now behind it, the company could move forward decisively. He noted that improving market conditions coupled with the cost reductions that had been achieved should see a solid improvement in the company’s performance this year. Further benefits would come through in following years, as output from the company’s forests rose and the full benefit of the company’s investment in value added processing was realised.
At the Group level the net loss was $1,377 million including unusual items of $1,324 million. The additional loss primarily reflects further write-downs of $578 million as a result of the higher forest estate carrying value at the Group level.
Operating revenue of $648 million was up 4%, led by continued growth in US sales (up 15%), although difficult market conditions saw reduced margins in other areas. As a result, EBIT, excluding unusual items and accrued interest income, fell to $3 million compared to $28 million last year.
The company's results were adversely affected by the severe post-GST downturn in the Australian building industry (down 40%); the slow-down in New Zealand (15% below long term levels); very demanding conditions in Japan; and export log markets which suffered from weak demand and competitive supply.
Despite this very difficult operating environment, as a result of good working capital management and lower overhead costs the company is generating positive operating cash flow. Net cash from operating activities before separation costs, less capitalised interest, was $10 million compared to $20 million last year.
Sir Dryden noted that as a result of the separation from Fletcher Challenge, the company now had the benefit of a stand-alone new Board and corporate management, tightly focussed on Forests' core business.
The new Board had initiated a strategic review and the initial outputs confirmed that the company had a number of fundamental strengths that would support future earnings growth:
- A forest resource with rising harvest levels. This would generate significantly higher earnings for the company in the future, even without the benefit of improved prices.
- A competitive cost position for its forest and manufacturing operations. In a recent international benchmarking study, the company's manufacturing plants ranked in the lowest cost quartile.
- Well advanced added-value processing and market entry strategies, which were already reaping the benefits of past substantial investment.
He also noted that following the recent recapitalisation, the company had a solid capital and financial base from which to initiate further development.
Addressing operational strategies, Chief Executive Terry McFadgen, said Fletcher Challenge Forests had three powerful drivers at work to improve earnings:
- An overhead cost reduction programme which had achieved annual savings of $14.5 million.
- Sustainable harvest volumes which would increase by over 60% over the next seven years, with a growing proportion of valuable pruned wood (from 5% to 20% of total harvest).
- Improving trends in key markets, which, with the exception of Japan, appeared to be coming off cyclical lows.
He noted that the company's performance in the United States had been an outstanding feature of the year. Demand from this market remained firm. In addition:
- In Australia housing activity was set to lift sharply and product prices were showing signs of improvement.
- In Korea, construction activity was growing and modest price increases for logs were being recorded.
- New opportunities for softwood were emerging in India and the Philippines. The demand for imported wood in China was increasing and the medium-term demand outlook in that market was very strong.
Mr McFadgen said that it was expected that the company would record a modest profit for this financial year, prior to any movements in the value of the forest estate and any unusual or unforeseen items.
The Directors have not declared a dividend in respect of the financial year ending 30 June 2001.
Attached is a more detailed summary of the company's financial results.
Fletcher Challenge Forests will conduct a conference call to discuss information in this news release and related matters at 12:30 pm NZ time on Thursday 23 August. The call will be hosted by Terry McFadgen, and will be an opportunity for analysts and institutional investors to ask their questions. If you would like listen-in access to the call, dial 979-0096 (within Auckland); 09 979-0096 (within NZ); or +649-979-0096 internationally. Enter 5961061# when prompted for your Passcode. The call will be recorded, and will be available on our website (www.fcf.co.nz) later in the day, along with a PDF file of the Annual Results.
Forward Looking Statements: Comments in this release 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 23 of the Fletcher Challenge Forests 2001 Annual Review for an explanation of the factors that could cause actual results to differ materially from those expressed.
Fletcher Challenge Forests owns or manages almost 300,000 hectares of fast growing environmentally certified forest, and ten sawmilling and re-manufacturing facilities, all in the Central North Island of New Zealand. Fletcher Challenge Forests markets solid wood products to all major markets in the Pacific Rim and North America. The company's vision is to achieve global leadership in the supply of softwood timber products, sourced from renewable plantation forests, and servicing our customers in the highest value end markets through carefully targeted delivery strategies.