Seeing the wood from the trees

At Carter Holt Harvey, signs for staff functions sometimes point
up wooded gullies. Team building can mean an endurance event in a pine
plantation, rather than a Friday drinking session.

Fitness assessments and training programmes are subsidised. Participation is encouraged, but not compulsory.

A
couple of weeks ago, 421 managers and employees sweated their way
through the biggest event, the Carter Holt Harvey Treehouse Fitness
Challenge at Woodhill, a forest and mountain biking playground north of
Auckland.

Conditions were perfect for the 11km or 21km run or walk, but it hosed down for the 30km bike ride.

Chief
executive Peter Springford, recovering from minor surgery, did not
compete, and chief financial officer Jonathan Mason did only the 11km
run this year because the half-marathon last year did his ankles in.

Now
many people would argue that drinking functions are a proven form of
team building. But Carter Holt, New Zealand's largest forestry company,
is simply making the point that it is good to be fit - as an individual
or a corporate.

Given the tough conditions it faces, it is easy
to understand why it wants to convey the message. The New Zealand
market, in the midst of one of the most sustained economic booms in
recent history, is no problem.

But markets for pulp, paper, logs and packaging overseas - where it makes most of its money - are a different story.

The
dollar, now tracking at 16-year highs against the greenback, is a bit
like the hill around the 30km mark in the old Fletcher Challenge
marathon course in Rotorua - an unwelcome incline where you either hit
the wall or burn off the competition.

To counter this rise,
Carter Holt has to make $150 million more profit this year just to
stand still. At the same time, local support for the company has been
weak. Few in the industry wish to go on the record but the company has,
at various times, been accused of pillaging forests to boost its
profits, badly managing forests, selling below-specification
construction timber and favouring supply to its own mills.

Other
accusations include cutting work for its many forestry contractors with
little warning and then demanding starts without giving adequate
warning and, finally, over-selling an average performance.

People say the right hand is quite often doing something different to the left hand.

Investor
criticism has eased as the share price has risen from $1.80 two years
ago to $2.20 yesterday. But many are still ready to give it a
bollocking.

Retired accountant Max Gunn, 90, who has been
berating Carter Holt at annual meetings for 13 years, says he still
prepares tax returns for widows who bought shares for $3.80 apiece.

"It has been most distressing," he said.

They
have lost savings on an investment in the biggest player in an industry
that was supposed to create great wealth for this country.

Gunn
is not sure if he will go to next year's annual meeting because he is
entered in the over-90s division of a tennis tournament, but he
concedes there has been some improvement.

He says he is seeing a
new earnest spirit at the company and welcomes news of cost-cutting at
head office as overdue. He thinks Kinleith workers, who last year
struck for 90 days, will too.

The company changes this year are considerable and some big steps are looming.

It
is countering the rise in the dollar with an efficiency drive, known as
the total productivity improvement programme. By the third quarter, it
had $93 million of savings nailed.

Although it is unlikely to
meet the $150 million needed to offset the damage wrought by the
dollar, investors still regard the savings as a creditable performance.

Mason
says the challenge of the rapid appreciation of the local currency will
not happen every year and, having made the hard yards, the company is
now set to benefit from any easing in the exchange rate.

"While
we have a challenge to our competitiveness now, if we continue to work
on our controllable costs, eventually that will make us more
profitable."

Carter Holt's mantra is to be as good as any
competitor in the world, especially those from Chile and Canada. It is
also to be the number one operator in Australia and New Zealand (known
as the multi-domestic strategy) and look for growth in China.

The
A$85 million ($93 million) bid for Australian packaging company
Wadepack, unveiled last week, is a case in point. It will increase
Carter Holt's share of the Australian cartonboard market to 30 per cent
from 18 per cent, nicely elbowing number one player, Amcor, on 33 per
cent.

The company had 20 per cent of its assets, 35 per cent of
its staff and earned 45 per cent of its revenue in Australia before it
sold its Australasian tissue business this year for $1 billion.

Its
interest in four rival saw mills and a plywood business in the centre
of the North Island put up for sale by rival Tenon is also about having
big market positions and efficient processing sites.

Tenon, the former Fletcher Challenge Forests, is selling the mills to focus on appearance grade manufactured wood products.

The latest moves have also seen Carter Holt close a sawmill in Tokoroa and sell another in Rotorua.

Despite
the strike at Kinleith, it managed to cut the workforce and put the
remainder on a salary rather than an hourly rate - moves which tore the
Tokoroa community apart. Similar changes have been made to the Tasman
pulp mill in Kawerau.

Carter Holt has invested hundreds of
millions of dollars in new equipment, principally at Kinleith, and has
put both mills on a solid money-making path at average long-term prices.

This
is the part of the business that is most reliant on exporting - 70 per
cent of sales are overseas - and will always be tossed around by
currency and commodity prices.

Carter Holt's biggest commodity
exposure is to pulp. The per tonne price of US$602 at the end of June
fell to US$475 by the end of September. It has since recovered to
around US$500, but that still compares with a period in 1995 when it
was selling for US$900 a tonne.

Despite these caveats, some analysts go as far as calling these mills cash cows.

In
wood, the company has big market positions in structural timber framing
and in many segments of the particle board and medium-density
fibreboard markets in Australia and New Zealand.

It regards
packaging as one of its best businesses after some hard work in the
past five years. "We're focusing now on making it a bit better," said
Mason.

In forests, the company has the biggest estate in the country and is looking to sell one-third of its 300,000ha of forests.

Fletcher
Challenge Forests set the stage for Carter Holt's move when it sold its
entire 107,000ha forest to a consortium of property investors and
specialist North American forestry investors.

Like Fletcher
Forests, Carter Holt has never really made an adequate return on
capital invested in forests. And US investors enjoy tax advantages not
available to New Zealand forestry companies.

Carter Holt has
been slowly selling small bits for conversion to dairying. But, unlike
Fletcher Forests, it wants to keep some of the trees to supply its
mills.

Already it has singled out the Kinleith forest, which is
seen as a signal that it wants to remain a big player in the centre of
the North Island.

The Fletcher sale and other disposals
installed global timber funds such as GMO Renewable Resources and the
Harvard University endowment fund, upsetting the balance of power.

The proof of Carter Holt's actions could come at next year's annual meeting.

Last time, chairman John Maasland said: "I believe what we are doing now as a company will get that share price up."

He is likely to say the same, but this time there is a chance investors may believe him.

DECISIONS, DECISIONS

* Keep forests or sell them. Carter Holt has decided to sell one-third.

* Buy Tenon's structural sawmills or get outbid by someone else. It can get more synergies than any other buyer.

* Expand more in China.

* Build a huge new sawmill at Marsden Pt or Kinleith.