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Fletcher Forests posts $302M loss

By Phil Boeyen, ShareChat Business News Editor

Tuesday 26th February 2002

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Fletcher Challenge Forests (NZSE: FFS) is pointing to a strong recovery in first half operating results although it posted a net loss of $302 million after writing off its subordinated loan to the Central North Island Forestry Partnership.

Sales for the six months ended December were $314 million, lower than the previous year's $322 million, however earnings before interest and tax and before unusual items were $41million, up from $8 million previously.

The Ebit figure includes an increase in the value of the company's forest estate of $17 million.

FFS claims the turnaround in operating performance shows the benefit of management's strong focus on reducing the company's costs of doing business and was achieved despite a weak global economic environment.

"It reflected a modest improvement in log and manufactured product prices assisted by higher sales. Manufactured product and forest estate log sales volumes increased by 10% and 8% respectively, compared to the previous six months," the company says.

While the sale process for the CNIFP has not yet been concluded the company's directors say they reviewed the carrying value of the subordinated loan and concluded that "if a sale of the CNIFP had been concluded as at 31 December 2001, the proceeds of the sale would not have exceeded the value of the senior bank debt."

"The directors therefore consider it prudent to write off the balance of the value of the subordinated loan of $349 million."

The 8% drop in overall revenue is being attributed to lower trading volumes sourced from third party estates and the company says volume from its own forests actually increased 8%.

Ebit in the forests and logs division was $19 million before unusual items and crop revaluation and compared to $5 million in the six months to June 2001.

"Improving demand underpinned the performance of the business. Strength in the Korean construction sector saw a 36% increase in sales to that market, by volume, including CNIFP sales, compared to the previous six months."

While the market in China is showing growth the company says Japan continued to decline in relative importance with sales volumes down 29% and prices at or below the levels paid in the competing Asian markets.

On the domestic front, log demand was underpinned by a strengthening residential construction sector in both New Zealand and Australia.

Processing and distribution Ebit was $5 million for the period, up from $3 million in the six months to June 2001.

"Conditions in the Japanese engineered wood product market remained difficult resulting in a loss of $3 million in our Japanese business unit.

"A strong recovery in Australian house construction and steady demand from within New Zealand supported processing and distribution revenues of $196 million for the period. This represented a 16% increase compared to the six months to June."

Fletcher Forests is picking a generally positive market outlook for the second half except for Japan, which remains in recession.

It says construction activity continues to strengthen in Korea and demand and prices are lifting in the United States while the Australasian markets are showing strength.

"The developing markets of China and India are also showing positive momentum in both volume and prices, with China being particularly strong supported by high GDP growth and restrictions on domestic logging.

"We expect the positive trend in operating costs to be maintained in the current half year with the result that, in the absence of unexpected adverse events, the company's operating earnings for the half year to June 2002 should show continued improvement relative to the first half."

The market had been hoping for some further news of the CNIFP sale but FFS has little new to report apart from reiterating that it is interested in buying the asset although it is not critical to its operations.

No dividend has been declared.

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