CHH flags $900m writedown

By PAM GRAHAM

Carter Holt Harvey, New Zealand's largest forest-owner, is cutting its annual harvest 15 per cent and signalling a writedown in the value of its estate by $900 million - about a third.

The decisions were announced yesterday as the company said it had increased net profit 26 per cent in the six months to June.

The $92 million profit came through strong housing markets in Australia and New Zealand and cover against the high dollar, and despite the 88-day Kinleith strike.

"It's a game of two halves," said chief executive Peter Springford of the outlook for the sharemarket's second-biggest company.

"We expect domestic businesses to perform well, however, a strong currency and weak commodity prices will dampen our earnings from our export-focused businesses."

The same reasons were behind the decisions to let trees grow more before harvest and to write down the $2.9 billion forest estate at the full year for the first time since it was bought from Forest Products.

The high kiwi dollar, a flood of Russian softwood into China and rising international freight rates were affecting the outlook for forestry and valuation of assets.

CHH's executive in charge of forests, Devon McLean, said letting trees grow created value by increasing the age profile of the crop.

"It also moves the increase in harvest volume to a time closer to when Russian supply could decline."

The harvest of 6.4 million tonnes a year has been reduced by 500,000 tonnes. By September another 500,000-tonne reduction will be made.

Springford said this meant harvesting crews would be laid off.

But his key message yesterday was positive, although unquantified.

A pilot study comparing the Tasman linerboard mill with the world's best practice had found a $39 million "prize" from cost savings and efficiency gains.

Tasman had already achieved $9 million of this.

"With aggressive management, real improvements can be achieved quickly," Springford said.

The exercise was being applied to 14 Carter Holt businesses.

"We do not intend to put a number on the opportunity we have identified, but we will report as we achieve results."

The strengthening New Zealand dollar had eroded competitiveness but foreign exchange contracts allowed the company to bring US dollar sales back to New Zealand at 44.4USc rather than at yesterday's 58USc.

Chief financial officer Jonathan Mason said the cover was worth $180 million a year to Carter Holt. This would decline to $60 million to $70 million next year.

Springford said the company lived with the foreign exchange rate, did not try to predict it, and would use the time given by the cover to cut costs and improve production.

"Even with some cover next year, we need to make up $120 million just to stay still and we do not intend to stand still. It is our aim to be world-class," he said.

But the company is still making a return of 6.6 per cent on its measure of return on capital invested, short of its 10 to 11 per cent cost of capital.

Forests returned 3.5 per cent, wood products 11 per cent, pulp and paper 6.8 per cent, tissue 10.5 per cent and packaging 10.4 per cent.

The June quarter net profit was $41 million, down from $56 million last year.

Earnings before interest and tax were $68 million, down $24 million on last year.

Sales in the six months were worth $1.84 billion, down from $2 billion last year.

The Kinleith strike took $38 million from interim earnings before interest and tax, $31 million of it from the pulp and paper business.

A change in accounting policy for pulp and paper - it will be carried in the books in US dollars, not New Zealand dollars - will reduce the need for foreign exchange cover and lower interest costs by $30 million a year.

Springford said the company was concerned about infrastructure in New Zealand, and electricity supply was still a long-term issue.

Carter Holt declared a 3c a share interim dividend and Mason said the company hoped to increase its total dividend payout. The company paid no tax.

Commodity prices were generally described as languishing until the global economy picks up.

Rival Fletcher Challenge Forests has its forests for sale. Will Carter Holt follow?

"That's a longer-term question for us," said Springford. "Obviously there is enough for sale at the moment, and it would not be a good time to even consider it."

Losses lead to gains

The 88-day strike at the Kinleith pulp and paper mill cost Carter Holt Harvey $55 million in lost cashflow, and redundancies last January cost a further $25 million.

The company said the costs had given it a competitive workforce to match its world-class equipment, and the business would improve significantly in the next six to nine months.

Rhys Jones, the chief operating officer responsible for the pulp and paper business, said the settlement of the Kinleith strike on May 28 had led to a significant behavioural change.

"Both parties agree it is a better situation than expected, and we are both very comfortable about the outcome."

He said the company got a financial benefit of $1.8 million a year by being able to run the mill for 365 days a year. Paying salaries had reduced the incentive to work overtime, and promotion was now on merit.

The site's collective agreement had expired in 2000 and the company had achieved the goal of not backdating the settlement. The issue of restructuring the fire brigade had been put to one side.

The company was optimistic that the new collective agreement and contracting out maintenance would improve output. Since the strike paper and pulp were being produced at or above expectations.