Fletcher can see the wood for the trees

By Duncan Bridgeman

Friday 13th February 2004

Fletcher Challenge Forests is on track to meet its forecast net profit of slightly more than $20 million this year, chief executive John Dell said yesterday.

Amid its transformation to a wood processing and marketing business, the company reported a first-half net loss of $26 million, compared with a $4 million profit in the previous corresponding period.

The result included a writedown in the carrying value of the company's forest assets of $38 million after tax.

Mr Dell said he was comfortable with the financial projections for the new look company, assuming the sale of its 100,000ha forest estate to Kiwi Forest Group gained shareholder approval next week.

Since releasing the profit guidance in December, there had been further appreciation in the Kiwi dollar but that was offset by a recovery in the US Molding and Better market, Mr Dell said.

The higher Kiwi dollar against the US dollar had reduced earnings by about $12 million over the six months. However, the company's hedging policy saw it receive forward currency gains of $7 million.

Operating earnings before the forest revaluation fell from $47 million a year ago to $23 million.

The drop in earnings largely reflected the currency movement, high shipping costs, reduced sales from forest estates and loss of synergies from the cancellation of the Central North Island Forestry Partnership, the company said.

Operating earnings from the processing, marketing and distribution business were $19 million, compared with $21 million in the same six-month period in 2002 and $9 million for the six months to June 2003.

Part of the company's $725 million forest sale fell over when Kiwi Forests Group failed to organise finance for the $165 million Tarawera Forest before the January deadline.

The company has reverted the sale of Tarawera to The Campbell Group, a US-based company that had earlier vied with Kiwi for the entire estate.

Mr Dell expected further interest from other parties and did not rule out a second contested sale process.

The company has already paid $35 million in selling costs, including part of a $17 million "break fee" to Campbell.

Total selling costs of $45 million are expected.

The company planned to return up to $669 million to shareholders or $1.20 a share in two instalments, the first in March, the next in the second half of 2004.

That compared with a share price at midday yesterday of $1.34.

The transformation out of forests will lead to a number of redundancies at Fletcher Forests. Mr Dell said yesterday that total staff numbers would be reduced from about 1350 to about 920.

The sale requires only 50% shareholder approval at a meeting in Auckland next Friday.

Fletcher Challenge Forest's loss was on sales revenue of $327 million, compared with $350 million the same period a year ago.

Sales volumes fell 14% compared with the previous corresponding period following the sale of mature forestry rights to UBS Timber Investors.

The North American Consumer Solutions segment was impacted by the strong Kiwi dollar and weak US lumber prices. Earnings before interest, tax and depreciation were $13 million for the six month period, compared with $19 million for the December 2002 period.

During the period the company increased its stake in US-based company, The Empire, to 67% from 34%.

At press time Fletcher Forests shares last traded down 1c at $1.34.

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