Confusion reigns in CHH annual report

Friday 29th June 2001

Have you ever looked up a word in the dictionary and found the explanation as impenetrable as the original word?

Carter Holt Harvey's latest annual report is a bit like that. At first glance, the company makes meaningful statements about its performance and prospects, but further scrutiny results only in confusion.

Much of the front half of the report is devoted to three aspects of its business: performance, innovation and leadership.

The performance section starts: "When we talk about performance, we mean three things.

First, we mean performance improvement - the actions and activities that make us better operationally and financially.

Second, we mean performing better for our customers.

Finally, performance means delivering on tough targets in safety and environmental practice."

In the Carter Holt dictionary, one cannot find out what it means by performance‚ without first finding out how it defines the concept "better." This will mean different things to different people.

To a shareholder, better means higher profits, to customers it means improved products or lower prices and to environmentalists it means less pollution.

And what does the term tough targets mean? Again these fine sounding words are not defined or explained.

Fortunately, other parts of the document are less opaque. A letter to shareholders by chief executive Christopher Liddell and chairman Sir Wilson Whineray does not try to gloss over the company's poor performance.

Straight-shooting comments include: "Our returns to shareholders are still not adequate," "market conditions remain tough and are unlikely to improve in the short term," and "the global slowdown means the next 12 months are likely to be difficult."

By telling it like it is, they gain respect from stakeholders. Their assurances that "we remain positive, particularly with our new acquisitions delivering their contribution to earnings" have more credibility as a result.

This is enhanced by the omission of the traditional highlights‚ pages that trumpet the best numbers, even though the company could have emphasised its 17% increase in sales and net profit.

Regrettably, it also leaves out a five-year performance summary that should be standard for a company of its size and prominence (and ought to be compulsory for all).

Like many reports, Carter Holt makes a big noise about its employees, to the extent of scattering pictures of them on most of its early pages and making the document look like a clothing catalogue.

As a employee-relations exercise, this will have limited benefit since the company also crows about "delivering a 32% increase in direct labour productivity and a 21% reduction in staff" in its packaging division.

While its bottom line looks healthier, the statement of cash flows shows a marked deterioration in net surplus from operations in the year to March 31, a mere $47 million against $412 million last year. Operating earnings before interest and tax indicate a gross margin of 9.6%, an improvement on 2000 of 7.7%. Shareholders' equity has strengthened from 56.7% of total funds to 62.5%. Unfortunately, the return on shareholders‚ funds of 4.7%, up from 4.1% last year, is still well below what investors would consider acceptable.

Segmented figures in notes to the accounts show packaging and distribution as major culprits. Their gross margin this year was 1.6% and 2.7% respectively, offsetting excellent profitability from the forests and pulp and paper divisions.

This is a perfectly adequate annual report that deserves praise for taking responsibility for underperformance. However, it seems to lose its way in talking about its "success stories" and forgets to explain how and when it is going to deliver improved performance, innovation and leadership.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. www.mcewen.co.nz, davidm@mcewen.co.nz

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