My annual report comments have outlined our view on the Forestry sector, its challenges and opportunities and what we see as the matters for us to address in the year ahead.
There are some particular
issues I would like to expand on-
1. As you will have been aware, Xylem Investments manages funds on behalf of US based Pension Funds. Under the terms of its management contract, a review was undertaken this year that resulted in Xylem’s management of the Xylem fund that includes the Evergreen investment being terminated. Pursuant to this change, the two Xylem Fund representatives on the Evergreen Board resigned.
We anticipate a replacement manager will be appointed shortly and following that, discussions will take place with the new manager of the fund in relation to representation on the Evergreen Board. The Evergreen board next meets in February 2003 and I would expect announcements to be made at that time if not before.
The notice of meeting was issued with the expectation that manager appointment and representation would be determined by now. Unfortunately we have not reached a stage where the nature of representation can be determined.
The Board has decided that any consideration of director’s fees in aggregate and per member, should best be addressed when the manager appointment process is concluded and we can discuss representation with the new fund manager.
Accordingly, unless there is any objection, item 3 will be withdrawn from the agenda for today’s meeting.
2. Trading in the first quarter has been ahead of budget for both volume and profit but we would expect that position to be adjusted back to forecast levels over the second quarter as the company shifts its main harvesting focus from our Rototuna Forest in Northland to the Coroglen Forest in the Coromandel. Our forward planning does give us confidence in meeting our production and cash flow targets for the full year subject of course to price and currency influences.
Based upon current market conditions, we are anticipating another profit increase this year.
3. There has been considerable recent focus on major New Zealand forestry companies and in particular the need for resolution to the long-standing uncertainties over Central North Island forests. More recently some advocacy for industry grouping to improve market effectiveness and present a more consistent face to international markets has been advanced. It is my opinion, and I have stated it in each of the last two years, that many of the now stated objectives can be achieved by a sensible and structured approach to investment, and marketing and distribution needs.
There are quite significant and fundamental differences between the dairy and forestry industries, their ownership and supplier structures, the extent of off shore investment in New Zealand now and the level of investment required to expand, -the international supply / demand drivers and the underlying culture of the respective industries That is not to say groupings, alliances and future mergers should be resisted. It is really much more about ensuring what is contemplated will have the outcome shareholders expect – namely an improvement to share value and yield and an ability to hold an investment in companies that are well governed and earn a reputation that des erves investor support.
4. It is encouraging to see political assurances for regional development actually eventuating. The identification of Northland and the East Coast as areas of early investment is very good for us. It is also an excellent means of maintaining and enhancing the retention of communities and their infrastructures, which this forestry industry is uniquely able to support through employment in sustainable industries.
5. The Kyoto Protocol principles are supported by Evergreen but the methodology for nationalising sequestration credits that we believe belong to our shareholders is an anathema. It is pleasing to note that the huge importance Forestry has for this country is being recognised, (albeit belatedly), and some progress in Government’s understanding of the need to invest in the sectors success is evident in recent discussions with industry representatives.
Forest Industry estimates are that the net present value of these nationalised sequestration credits is $1.5 billion. The level of appropriation out of the forest industry is huge and that needs to be recognised and more reasoned policies considered.
It is easy to say our comments are self-serving. That is patently not so. We are firmly committed to play our part and we do so on a day-to-day basis. This year we have “retired” for conservation purposes some 500 hectares for natural regeneration and we are well advanced with international certification of our forests as being sustainably managed on a social, environmental and commercial basis.
6. We do live in uncertain times. The last few weeks have reminded us that any organisation that depends on markets in Pacific Rim countries will need to anticipate some volatility. The smart strategy is to be flexible, invest to add value to what is produced and to seek alliances with those who want to develop longterm relationship based associations. We have done that in Korea and are moving to do the same in China and the USA. We believe profitable long-term business opportunities are those done with people who trust each other.
7. We have successfully restructured our debt profile. Our banking terms have been renewed on the basis of a 5-year term and we are in the final stages of negotiating a 10-year loan to replace the vendor loan from Carter Holt Harvey.
That result and further conversion of convertible notes has strengthened our balance sheet position, which was one of our major objectives over the last year.
8. The share buy back programme announced last year has resulted in 678,000 shares being repurchased and these have subsequently been cancelled. On an annual basis this represented 5.22% of traded ordinary shares. We have decided to continue the programme and include convertible notes as advised to shareholders by separate notice on 28th August 2002. There has been minimal activity under the new authority. (70,000 shares)
Evergreen has achieved well if compared with its peers in this industry. The reward for our shareholders are none the less well short of what your Board regards as acceptable and indeed it is our view that we must continue to take such steps as are necessary to deliver yields which better reflect our cost of capital. The forestry sector is challenging but Evergreen will continue to steadily improve its harvest capacity, seek to grow where growth will add value and focus on improvements in operating cash flows.