Evergreen Forests: Chairman's Address
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&P 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.