Peter Springford: CHH straying? Nothing could be less true

Suggestions Carter Holt Harvey might no longer be competitive and had lost its way over its cost structure and strategic direction could not be further from the truth.

CHH's relative performance was compared with nine other New Zealand companies. However, six of these are not competing internationally, at least one enjoys an almost total monopoly and only one is a multinational company of a similar size. It is true, CHH operates in a competitive commodity industry but when looking at returns like should be compared with like.

In the last five years, CHH's return to shareholders has exceeded that of the Standard & Poor's forest products index.

A more informed look at the company's recent track record shows CHH is controlling the factors it can, prioritising innovation as a source of shareholder value and managing the risks faced by any global player, such as fluctuating foreign currency, demand and prices.

We have adopted a strategy to grow the business in the areas where our scale and expertise gives us a competitive advantage in domestic and international markets.

The sale of Tissue was the first major step towards this. A significant proportion of the $440 million sale profit will be reinvested in growing the core business.

The purchase of Chinese premium panels business PTP is an example of this as is the acquisition of the Tenon structural business.

Costs have been reduced in wood products, pulp, paper and packaging. CHH's on-going focus on productivity has delivered gains of $113 million in 2004 alone, or about $11,000 for each one of the more than 10,000 company employees.

In 2004, the Kinleith pulp and paper mill produced 9 per cent more than ever before - a 32 per cent increase in productivity compared with 2002.

Moves to increase productivity are being applied to all businesses including head office, where a review and reorganisation late last year delivered a 20 per cent cost cut.

But creating shareholder value is not just about cutting costs. It's about working with customers to develop new products to meet emerging commercial challenges. It is correct the present approach to innovation at CHH is less visible than it was a few years ago. While successful offspring of the original ideas to business (i2b) programme such as Oxygen Business Systems and Climate Coatings continue to grow strongly, innovation is now a key part of how we do things daily. The proof? Today, 16 per cent of the company's sales are from products and services that did not exist three years ago, up from 5 per cent in 2001.

Australasian market leadership in timber, plywood and MDF, pulp and paper and laminated veneer lumber has been assisted by the Carters distribution channel, which delivered record earnings last year.

CHH is acting to combat the low prices in the forestry industry. Last year, the harvest was reduced to 4.9 million tonnes from 5.7 million tonnes in 2003 and 6.5 million tonnes in 2002. Harvesting and distribution costs were reduced last year by more than $3 per tonne - an 8 per cent saving year on year.

CHH's forest returns are unacceptable and, therefore, a third of the 330,000ha estate will be placed on the market to capitalise on international interest.

It may seem CHH has a relatively high number of employees earning more than $100,000. However, of the 809 mentioned, 121 relate to positions that have been removed and, therefore, include payments such as redundancy and accrued leave. Another 130 of the 809 earn less than $100,000 in their local currency - Australian dollars. Taking this into account, CHH is in step with other large NZ organisations in regards to remuneration.

And rather than present governance concerns, senior executive movement between CHH and its global parent company, International Paper, is a sign of a healthy global company. CHH shareholders have seen a year where earnings improved from 6.7 per cent to 7.2 per cent, reflecting increases from each business group.

* Brian Gaynor replies: My main criticism of Carter Holt Harvey is its escalating senior executive salary structure, a variable the company has control over.

In 1997, the group reported operating earnings (earnings before interest and tax) of $346 million and its senior executive group (those on $100,000 plus) were paid $31 million. In the December 2003 year, Carter Holt had an operating profit of $315 million and its senior executives received $122 million. So, executive pay has surged from 9 per cent of operating earnings in 1997 to 39 per cent in December 2003.