Carter Holt's Liddell dusts off chainsaw

Friday 25th January 2002

Carter Holt Harvey wrapped up Project Genesis, a three-year cost-cutting drive, last year. Sticking to Old Testament precedence, the next round of slashing, announced on Tuesday by chief executive Chris Liddell, should be named Project Exodus.

Judging by the 10% share price lift immediately after the dreary result investors aren't taking the hint.

That's partly down to the perennial chirpiness of sharebroking analysts. Carter is the local market's second-largest stock. Like leader Telecom, it generates a big proportion of the turnover that puts panini on brokers' tables so "never say sell" is the watchword.

From a longer-term perspective it's hard to justify a buy recommendation. The shares haven't traded consistently above $2 for two years. They have never revisited the $3.60 majority shareholder International Paper paid 11 years ago.

For Liddell, now nearly three years into his job, the latest result looks like something of a personal defeat.

Liddell carried Project Genesis, started by predecessor John Faraci, through to completion but he brought with him a new approach to the profitability problems that have plagued the 102-year-old Carter.

The task he set himself was to remould Carter's corporate culture from top to bottom. "We're changing from a strict cost mentality to a market-based mentality," he told Unlimited magazine 18 months ago.

What he had in mind was a fundamental shift in the way Carter, like most of the world's forest- product companies, had approached the commodity price cycle.

The notorious practice was to invest the cash that poured in when prices were high into new production capacity. When the cycle turned down again, companies would try to preserve their profitability by slashing costs.

The focus, Liddell recognised, was entirely on tangible assets - trees, mills and machinery. The trouble was, the cost of the capital companies had invested in those assets was so high that, over the cycle, they destroyed value consistently. And they kept adding to the problem by building or buying ever more capacity.

Liddell's idea was to import the business philosophies of the not-so-New Economy. Carter's new watchwords were to be "innovation, performance, leadership." Operations that were not returning their cost of capital would be chopped ruthlessly; Carter's resources would be concentrated where products could be shunted up the chain from commodity to value-added.

The new culture manifested itself in various ways. Carter's marketers recognised, for example, that indulgent parents would pay more for the same tissues if the box was emblazoned with Bananas in Pyjamas.

Liddell backed the "i2b" programme, designed to fast-track the development of good ideas from Carter's staff, with a $15 million internal venture capital fund.

More controversially Carter's managers were encouraged to flex the muscle the company has, as the biggest local producer of many of its products, by exerting "price leadership."

An attempt last year to artificially boost log prices by buying up the local harvest backfired, resulting in huge stockpiles and a $5 million loss.

And the move to engender an entrepreneurial, small-company mentality by splitting Carter into 32 semi-autonomous business units, while consistent with the latest high-flown theories on the optimum corporate structure, has yet to prove its value.

It has added to Carter's reporting both more detail than you wanted, and not enough.

In the latest result we are told, for instance, that Sancella Pty's sales of Tena incontinence products were 13% ahead of last year. It isn't explained whether this is because Australian incontinence is increasing or because Sancella took market share from competitors.

Liddell is now predicting a continued dull performance for the next six months but a pickup when "the global recovery" kicks in, in the second half of 2002 if the pundits are right.

In the meantime "the company is aware it cannot wait for markets to improve."

"As a consequence of the uncertain global outlook and length of the economic slowdown," the results blurb notes, "a medium-term cost saving programme is under way, focusing on aggressively managing key controllables such as capital expenditure, information technology costs, recruitment, consultancy and working capital.

"Tough decisions will continue to be made to ensure that every business is capable of earning its cost of capital."

To many all this will sound suspiciously like the old-economy Carter. Has anything really changed?

Two years ago the company reaped $2.4 billion in cash from the sale of its share of Chile's Copec, an operation that was manifestly not pulling its weight. Carter used it temporarily to repay bank debt, chopping its overall cost of capital considerably. But it quickly borrowed up again and invested the proceeds.

Carter-watchers have been told the company has been "aggressively managing key controllables" for decades. If it hasn't, you'd have to wonder why not.

And the pay freeze for 900 senior employees doesn't look like the sort of move that is going to encourage those staff to volunteer ideas and spend long hours at their desks pulling the company out of its rut.

In short, the new economy Carter is starting to look very much like the old- economy Carter.

It's tempting to cross your fingers and hope a momentum is building out of which one of the biggest owners of our economy's resources will eventually burst, showering added-value wealth on its shareholders.

Those buying up the shares in recent days must have succumbed to that temptation. Shoeshine's wallet remains tightly folded.

Comments from our readers

No comments yet