The Shoeshine Column: Carter Holt Harvey's big shopping trip

Friday 20th April 2001

"When I hear the word 'culture' I reach for my gun," Joseph Goebbels, Hitler's Minister of Propaganda, is reputed once to have said.

It's as well the reichsminister isn't around any more as the offending word has been much bandied around recently by Carter Holt Harvey.

In particular chief executive Chris Liddell used it this week to explain the company's curious decision to split its six business groups into 32, each with its own CEO.

The move, Liddell explained at the March year profit briefing, was a culture thing, not an organisational thing.

The company aimed to capture the entrepreneurial spirit of the small company within the strength and stability of a larger parent.

As with a whole range of other things at Carter Holt, investors will just have to trust Liddell on that one.

While the promised benefits seem somewhat vaporous the downside seems all too clear.

Carter Holt's more prosaic Project Genesis, now in its final stages, has cut selling and administration costs as a percentage of sales from 14.5% to 12.5% in two years. It's hard to see how the company is going to keep the downward pressure on with 26 new business units replicating costs.

Another thing investors are going to have to trust Carter on is its promise the $2.5 billion it reaped from selling its stake in Chile's Copec, back in 1999, will be reinvested to beat the cost of capital and create real wealth.

Carter has struggled with this for many years. According to Stern Stewart's assessment of who is adding value for shareholders and who is not, Carter Holt again destroyed shareholder value last year - some $557 million worth.

Liddell is well aware Carter Holt has to beat its cost of capital, not just in the good times but over the cycle. A year ago he had $2.5 billion to spend. What has he bought, and how much is left?

Carter Holt's March 2000 balance sheet showed the company had a mere $350 million of debt after banking the Copec cash.

It has since invested $132 million in a new laminated veneer lumber mill at Marsden Point, and $423 million in CSR's Australian MDF (medium-density fibreboard) and particle board businesses, and a sawmill.

It also bought 25% of Pacific Millennium Paper, a Chinese paper maker, for an undisclosed sum.

Those investments had taken interest-bearing debt to $2.13 billion by the March balance date, just $640,000 below the $2.77 million it had in 1999 before it sold Copec.

This April, after balance date, it bought a Victorian sawmill for an undisclosed sum, and Norske Skog's Kawerau pulp mill for $311 million, with a potential $US10 million top-up if pulp prices improve.

So the Copec cash is pretty much all spent.

On the other side of the ledger there have been sales and cost-cutting.

In May last year Carter announced 23 redundancies at its Tokoroa plant, which has been struggling for a year and is still under review.

In July it sold, for an undisclosed sum, its Distributors division to Australia's Howard Smith. It also mothballed the Mataura paper mill and the Mount Burr sawmill.

All of this comes as a result of Liddell's big promise - to go through the group unit by unit, to axe those parts of the business that don't cover their cost of capital, and to invest Carter Holt's cash in businesses that do.

What's immediately obvious is that, to use a classical analogy recently re-employed by Fletcher Challenge, "the die is cast."

Debt levels are up almost to the highs they reached in 1997/1998.

But the song, for the latest result at least, remains the same. A brief revival of fortunes last year still didn't get anywhere near recovering Carter Holt's cost of capital. Things have got a lot worse since, and no better prospects are in sight.

Australian business confidence is at its lowest level since the 1990/91 recession and the picture over here, although brighter, is hardly bullish.

Australian building consents have fallen by about two-thirds over the last six months. New Zealand is again only a bit better.

Carter Holt was this week forecasting "worldwide weak demand" for its products over the next six months. That suggests the next two quarters may turn in operating earnings in the order of the March quarter's $51 million or less, a pathetic return on total assets of $8.1 billion.

So how seriously should we take Carter Holt's interest, implied in its Commerce Commission application, in buying the central North Island forests?

Not particularly, for two reasons. First, it can't afford them.

It has spent the lion's share of its Copec money and is nearing the debt levels it has had during the horrendous 1990s.

Second, the partnership lost $30 million last year. Log prices will no doubt recover sooner or later but Carter Holt won't want to repeat Fletcher Challenge's mistake by paying too much or overleveraging itself.

And third, Carter Holt already has an imbalance between its future woodflows and its processing capacity. It needs more mills, not more trees.

Given Carter Holt's dire financial performance over the past decade investors must be getting near the end of their patience.

The Copec cash looked like a last chance and it's unlikely Carter will ever again have so much money to spend.

So complaining about the vicissitudes of the cycle and "things we can't control" just isn't going to cut the mustard any more.

The company could have been debt-free but it chose to spend up. Now it's going to have to show it's a wise shopper.

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