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December quarter gives Carter Holt some cheer

By Phil Boeyen, ShareChat Business News Editor

Tuesday 22nd January 2002

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Stronger construction markets in Australia and New Zealand have helped Carter Holt Harvey (NZSE: CAH) to another record sales result for the nine months ended December although net earnings were slashed by 97%.

The forestry products company reports sales for the nine-month period were $3.154 billion compared with $2.854 billion previously however net earnings fell from $218 million last year to just $6 million.

The December quarter helped the result, with net earnings at $25 million compared with $15 million in the September quarter and a $34 million loss in the three months ended June 2001. However the December figure was still well below last year's were $42 million profit for the period.

Carter Holt has now changed to a December year-end balance date from a March balance and so Tuesday's announcement carried figures for the nine-months ended December with comparisons for the previous 12 months.

CEO Chris Liddell described the trading conditions for the year as extremely challenging, with a number of key influences such as pulp and log prices and the Australian building market being at or near cyclical lows during the year.

"The economic conditions have been extreme. To counter this, we have concentrated on short-term performance improvement through cost control. Initiatives included lowering working capital by $100m in the last 6 months of the year, a focus on overheads and a freeze on senior salary increases for the new financial year.

Mr Liddell says cost control will continue to be a major focus at the company because it cannot wait for markets to improve

"We don't expect the economic environment to substantially improve in the first half of 2002.

"Whilst we will still pursue our strategies of innovation and growth, the company will also stay aggressively focused on managing key controllables. We will continue to take the actions necessary to ensure every business is capable of earning its cost of capital on a sustainable basis."

On a divisional basis, Forests recorded earnings before interest and tax of $35 million on sales of $477 million for the nine months ended December compared with Ebit of $115 million on sales of $452 million previously.

"Forests earnings for the year were impacted by low export prices that were at cyclical lows for much of the year, inventory issues associated with weak domestic and export markets, and lower levels of stumpage sales due to weak markets in the first half of the year."

However the division has made a concerted effort to reduce inventory levels and says stood at 106,000 tonnes at the end of December, down from 326,000 tonnes at the end of June.

Korea continues to be the company's main market for logs, taking 1.3 million tonnes of logs, with exports to China and India increasing during the year, although sales to Japan slumped 20% and prices there were lower.

Earnings before income and tax for the company's Wood Products division was powered by a $16 million result for the December quarter. This made up more than half the $31 million result for the whole nine-month period.

"Wood Products' earnings were impacted by dramatic changes in Australian and New Zealand residential construction markets activity.

"The Australian market started the year in a weak state but finished strongly, buoyed by low interest rates and the First Home Owner's Grant. The immediate outlook in Australia continues to be excellent with good forward orders.

"The New Zealand construction market started to lift in the December quarter due to seasonal influences and lower interest rates. The New Zealand building market is expected to remain firm through at least the first quarter of 2002. Recent interest rate cuts, immigration inflows and housing consent increases should support current levels of activity."

One of the biggest earnings casualties for Carter Holt has been its Pulp, Paper and Tissue operation, which saw Ebit drop to $26 million for the nine-month period compared with $121 million previously.

CHH says the fall was caused by sharply lower export prices due to the global economic slow down which reduced demand for papers and packaging materials.

"Despite efforts by producers to curtail output and reduce inventory levels, prices slid steadily throughout the year to reach cyclical lows by the second half of the year.

"Overall, lower prices, inclusive of foreign exchange benefit, are estimated to have cost the Kinleith, Penrose and Whakatane mills $144 million over the nine months compared with last year. In addition, higher electricity costs, due to an unusually cold and dry winter, are estimated to have added $11 million to costs compared with last year."

The company says the major highlight for the division was the successful integration of the Tasman pulp mill, which has made an annualised cash flow return on investment of 14.5% since it was purchased from Norske Skog early last year.

Two of the more positive results in the latest CHH financials has come from the Packaging and Distribution divisions.

The group's packaging business tripled its earnings before interest and tax to $15 million for the nine months compared to last year while distribution's Ebit rose $1 million to $ 8 million.

"Carters, the company's building products distribution business, finished the year strongly, due to both normal seasonal factors and an underlying improvement in business activity. In November, Carters recorded its best monthly Ebit in six years, reflecting both the lift in business conditions and improvements made to the business' cost structure."

Ebit at BJ Ball Papers, the company's New Zealand paper distribution business, was similar to last year for the nine month period but Raleigh Paper in Australia improved by 6%.

Less rosy has been the company's foray into China. In March last year it took a 25% share, along with International Paper, in Pacific Millennium Paper Group (PMPG), a China-based pulp and paper distribution company.

"The acquisition has been successful in developing new markets for the company's linerboard and cartonboard products in China. PMPG's earnings to date have suffered from a reduction in imported board volumes into China due to lower customer demand for high quality board," CHH reports.

In announcing its full-year result Carter Holt Harvey reports it is in discussions with the ASX regarding taking a full compliance listing there, but will retain its primary listing and head office in New Zealand.

A dividend of 3 cents per share has been declared for the year ended 31 December and will not carry any tax credits.

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