FFS puts the past behind

By Phil Boeyen, ShareChat Business News Editor

Thursday 23rd August 2001

Fletcher Challenge Forests (NZSE: FFS) can console itself with the thought that things can only get better after posting some painful figures for the year ended June.

At the group level the company has recorded a net loss of $1.377 billion for the year, including unusual items of $1.324 billion.

These largely reflect the $533 million write down ($768 million before tax) of its investment in the Central North Island Forestry Partnership and the $752 million impact of the new market value based approach for valuing its forest estate.

On the proforma Forests division accounts the company showed a loss of $749 million for the year, dominated by the CNIFP writedown.

The company also accounted for separation costs of $55 million.

Sales revenue Chairman Sir Dryden Spring says the annual result is unacceptable but largely unavoidable.

"It reflects the final wash-up of the Fletcher Challenge Group separation process, costs of restructuring, the change in forest estate accounting policy, the CNIFP receivership and the down cycle in major product markets faced over the past year.

"Operating revenue of $648 million was up 4%, led by continued growth in US sales, up 15% to $125 million, although difficult market conditions saw reduced margins in other areas.

"As a result, Ebit, excluding unusual items and accrued interest income, fell to $3 million compared to $28 million last year."

The company says its results were adversely affected by the severe post-GST downturn in the Australian building industry, the slow down in New Zealand, demanding conditions in Japan, and export log markets which suffered from weak demand and competitive supply.

"Despite this very difficult operating environment, as a result of good working capital management and lower overhead costs the company is generating positive operating cash flow. Net cash from operating activities before separation costs, less capitalised interest was $10 million compared to $20 million last year," says Sir Dryden.

FFS has begun a strategic review of the company and says initial outputs confirm it has a number of fundamental strengths that will support future earnings growth, including a forest resource with rising harvest levels and a competitive cost position for its forest and manufacturing operations.

It also shows the company has well advanced added-value processing and market entry strategies, which were already reaping the benefits of past substantial investment.

Sir Dryden says following the company's recent recapitalisation, it has a solid capital and financial base from which to initiate further development.

Chief executive, Terry McFadgen, says the company has three powerful drivers at work to improve earnings. These are an overhead cost reduction programme which has achieved annual savings of $14.5 million, sustainable harvest volumes which would increase by over 60% over the next seven years, and improving trends in key markets, which, with the exception of Japan, appeared to be coming off cyclical lows.

Mr McFadgen says the company's performance in the United Sates had been an outstanding feature of the year and demand from the US remained firm.

The company is forecasting a modest profit for this financial year, prior to any movements in the value of the forest estate and any unusual or unforeseen items.

No dividend has been declared.

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