Evergreen Forests: Chairman's Address
Chairman's Address to Shareholders
Our Annual Report publication is our means of communicating with our stakeholders in an expanded way and I trust the
additional commentary provided is of interest as well as being informative. The report document has a wide circulation
and is well received by industry and investor interests both here in New Zealand and offshore.
Analysts who look to better understand longer term value trends do look back to establish some guidelines for the
future. While it would be reasonable to ponder the relevance of such analysis given the considerable volatility in
International markets over the last few years and particularly the last few months, it does give some comfort to
investors in renewable resources in this beginning to the 21st century.
The US is the major price and investment driver for the forest industry. A recent analysis of US Forest Service data
stated again the fact that over the last century real timber prices exceeded the real price per share yield on the S 500. It went on to state, and I quote-"The world has little patience and immodest expectations - Investors greatly
prefer the fast growing weeds of the "new economy" to the "great oaks" of yesteryear".
As investors in the New Zealand Forest industry we can observe that returns in the last 10 years have been poor and the
sector generally has not met investor expectations. That is so, but the importance of the industry to New Zealand and
the opportunity to realise gains through investment in sustainable forest product production remains sound. . While some
of the significant influencing factors may be outside of our direct control, on balance we remain confident of
delivering a worthwhile result to our shareholders.
Our operating result for last year was on budget. The trading environment did get harder in the second six months but we
met our objectives. We were concerned to have a write down on our investment in Nuhaka Forest Fund, however having
adjusted for that change in value the net profit of $5.044m is good result and compares very well in the sector.
Your Board is also pleased to have concluded a share placement and buy back of convertible notes. The ten-year
convertible notes carry a right to convert to ordinary shares at 55c per share on the accrued value through to 2009. We
have therefore reduced the number of ordinary shares to be issued at that price and have undertaken this buy back at the
accrued value excluding any option value. This strengthens our balance sheet through increased equity and reduces
accruing interest costs on the notes. We will continue to seek opportunities to structure our debt to match anticipated
cash flows and preserve flexibility in harvest planning.
Growth remains an objective but we are constrained when the appraised asset value is considerably higher than the price
set by the market. Your Board takes the view that a pre tax unleveraged real return of 9%(implicit in the external
valuation) is an attractive return on long-term resource investments and that the discount to appraised value is
excessive. Major transaction evidence supports this contention.
Looking ahead we see trading confidence returning and increasing interest in product from major emerging markets such as
China where New Zealand exports to that market have increased significantly this year. We also see the NZ Industry being
more focused on maintaining a sustainable quality image for Radiata in international markets. Government and Local
Authorities are more cognisant of the role they need to play in ensuring infrastructure development in rural areas and
there are positive indications that there is a resurgence of understanding in the significance of agri-based industry to
the country.
In this environment we have the capacity to increase our harvest volumes and the year to date performance is consistent
with that. First quarter revenue for Evergreen forests is up 61% on an 86% increase in harvest volumes. Shareholders
will note that the consequence of increased harvest volumes is improved profitability and while the market for NZ Forest
products will determine the extent of profit improvement, it is notable that we now have the capacity to significantly
increase production and profit.
We must note however that market conditions have been impacted since September 11th and we are seeing some softening in
prices.
We commence our debt repayment programme this year and we plan to maintain a modest debt reduction programme with the
intention of further improving our debt ratio over time. Given present market conditions, your Board would not see
further acquisitions being financed by debt.
As I indicated last year we do see that growth will deliver increased economies of scale. Scale is a factor in
delivering better recognition for the Company and we would hope, improved liquidity in our stock. The task for your
Board is to achieve those goals while preserving current shareholder investment value.
We continue to investigate Joint Venture opportunities and service provision in forest management and marketing. These
opportunities are as much about relationships and investor compatibility as potential yields and we have made very good
progress in developing investment strategies with potential off shore investment partners. This Company can expect to
extend its forest management and marketing activities in this way and thereby develop additional income streams with
modest capital investment. We also see that we have a role in encouraging investment in debarking and log chip
facilities where these will deliver improved yields. We continue in our efforts to develop niche markets and support
improved technical expertise in the use of New Zealand radiata pine.
Shareholders have been informed of our planned share buy back programme. Having given careful consideration as how best
to enable those shareholders who wished to receive a distribution do so in a tax efficient way, your Board decided to
instigate a buy back programme which would also represent good value for the Company given the present price/ value
disparity.
The Company has made purchases of 450,517 shares at an average cost of 50c in the period from 31st August to 8th
November. The Board will review distribution options again next year when the results for the current year can be better
assessed.
I will now ask Mark Bogle to address you.