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Fletcher Forests Half Year to 31 December 2001

Fletcher Challenge Forests Half Year Results Announcement to 31 December 2001


AUCKLAND, 26 February 2002 – Fletcher Challenge Forests’ operating results recovered strongly in the six months to December 2001.

Earnings before interest and tax (EBIT), before unusual items, were $41 million (including an increase in the value of the company’s forest estate of $17 million), compared to $8 million in the six months to June 2001(1).

This turnaround in operating performance showed 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 sale process for the Central North Island Forest Partnership (in Receivership) (“CNIFP”) has not yet been concluded by the Receivers. The Directors have reviewed the carrying value of the subordinated loan and have 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 (US$145 million).

Net earnings before unusual items were $21 million. Unusual items, principally the write-off of the company’s subordinated loan to the CNIFP, totalled $323 million after tax, resulting in a net loss of $302 million.

Operations

Forests and Logs

Divisional EBIT, before unusual items and crop revaluation, was $19 million, compared to $5 million in the six months to June. A continued emphasis on lowering costs coupled with improved demand contributed to this good performance.

While total sales revenue fell 8% compared to the previous six months, this was the result of lower trading volumes sourced from third party estates. Volume from our own forests increased 8% compared to the previous six months.

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. December quarter NZ dollar fob prices into this market rose 15% over the June quarter, the result of both an improvement in delivered prices and lower shipping costs.

The market in China is also showing rapid growth from a low base.

Japan, however, continued to decline in relative importance with sales volumes down 29% and prices which are now at or in some cases 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, despite having to absorb a $2 million spike in electricity charges in this period. 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. Processed product volumes rose 10%.

An increase in sales of high value products to North America also contributed to the higher revenue compared to the previous period. The recessionary conditions experienced in the USA over the December quarter impacted prices somewhat, but volumes have remained steady and our key customers in the USA have reported continued strong consumer demand.

Forest Valuation

In June 2001 the company adopted a new accounting policy for its forest estate, which requires the estate to be, revalued each balance date applying market prices. The gain or loss in value is taken to earnings.

During the period to December the value of our forest estate rose 2%, or $17 million, to $1.14 billion. The after tax increment in value was $10 million, which has been taken to earnings for the period.

Our forest estate is still maturing and the volume being harvested is less than the biological growth on all remaining areas. The increase in value due to net biological growth was partially offset by slightly lower 12 quarter index prices.
Balance Sheet and Cash Flow

The company’s financial position improved during the period with a $34 million reduction in net debt, from $323 million at June to $289 million at December 2001. Net cash flow from operations, before working capital movements, was $22 million compared to $1 million in the previous six months(1). Investing activities contributed a net $13 million from the sale of assets.

CNIFP (In Receivership)

The CNIFP, in which the company has an economic interest as subordinated debt holder, has continued to carry on normal operations under the control of the Receivers appointed last year. Fletcher Challenge Forests is managing the estate under the existing management contract.

The Receivers are yet to conclude the sale process initiated in August 2001. Potential outcomes include an outright sale to one of the current bidders (which include Fletcher Challenge Forests), or rejection of all current bids and a continued period of operation in receivership.

We view the CNIFP forest as a desirable adjunct to our own forest, but not as something that is critical to our operations. We continue to have an interest in acquiring this asset if it can be acquired on a value-creating basis.

CITIC Litigation

In November 2001, a hearing was held in the High Court to determine whether CITIC or the Receivers owned the claims made against Fletcher Challenge Forests by CITIC in relation to the CNIFP. The Court reserved its decision, which is expected shortly.

Business Development

We are continuing to build our marketing capability in new markets such as China, to complement our traditional strength in markets like Japan and Korea. The rapid growth in penetration of the China market, where New Zealand export volumes have increased nine-fold in three years, is testimony to the potential value in this new arena.

In parallel, we are working with other major participants in the New Zealand forestry industry to build marketing and customer support capabilities in the growth markets in Asia, and to ensure that the costs of doing business are minimised by servicing markets on a collaborative basis, whenever appropriate.

Our processing operations continue to innovate with the introduction of new add-value products and, during the last six months, we commenced full production on our “clear boards” programme into the USA retail market, which has opened up an important new revenue stream.

We are committed to achieving further efficiencies in all our operations and see particular opportunities in forest management, logistics, shipping and export marketing. These will require a co-operative approach across the local industry.

Kyoto Protocol

The Government is likely to ratify the Kyoto Protocol in September this year. Government has signalled a gradual phased approach to implementation, and that it will be addressing the problems of businesses whose competitiveness will be affected by the Protocol.

We are actively working with Government in the consultative process to agree on mechanisms to avoid negative impacts on our business.
Dividend

No dividend has been declared.

Outlook

With the exception of Japan, which remains in recession, the market outlook for the second half of the financial year is generally positive.

In Korea, our major market for logs, construction activity is continuing to strengthen, log prices have been firming in recent months and forward activity indicators are good.

In the USA, demand and prices are lifting again after some softness in the last quarter due to the weakness in that economy, and recent housing and consumer confidence data are encouraging.

Australasian markets are showing strength assisted by healthy levels of residential construction activity in both New Zealand and Australia.

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.

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