Mark Bogle Chief Executive

Evergreen continued its record of increasing operating earnings in 2002. The net profit of $6.746 million represents a solid result and the company is well poised for future growth.

We are confident that our focus on resource ownership and our pure play structure is correct. We believe that the combination of operational flexibility and investment management skills will maximise shareholder value. The increase in reported profits is some evidence of this.

We are experiencing the transition from a company investing in its young crops for the future, to an operational forestry company generating positive cash flow and profits. This transition will become more evident as the company’s harvest levels increase and its other operational and marketing activities continue to grow.

Operations

Evergreen’s clearfell harvest was 186,394m³ this year, an increase of 14% over the previous year. In addition, the company sold 14,478m³ via stumpage sales. This combined total of 200,872m³ remains below the company’s near-term sustainable harvest capability of 360,000m³ per annum.

The ability of the company to alter its harvest mix to stay in tune with the log markets is an advantage of the pure-play structure. In response to changing log prices late last year, the company purposely targeted lower value stands that yielded virtually no pruned logs but good quantities of unpruned logs. As a result of this decision the harvest mix changed, with the proportion of pruned logs harvested down 27% on the previous year. Pruned log prices have subsequently improved with the net result being higher value recovery prospects.

We have increased our focus on Evergreen’s operations and three new appointments have been made to manage the company’s growing harvesting and marketing activities. Evergreen’s strategy is to directly manage areas that have the greatest potential to affect end-value. Previously, this was investment management (silviculture, planting, and inventory) and harvest planning (forward roading, resource consents). These new appointments signal our intention to increase our knowledge and resources in marketing and market development as the company’s harvest increases. In addition, the company has invested in a debarking unit in Northland to improve the quality of delivered wood to our customers. We will continue to seek incremental investments of this nature that enhance our export returns and offer positive investment returns.

Physically, our Northland forests provided the bulk of the harvest volume. Increasing volumes are now coming from our South Auckland forests. This trend will continue.

Markets

This year saw an increase in Evergreen’s volume exported from 59% of 2001 production to 74% of 2002 volume. Korea remains our most important market taking 38% of the company’s harvest volume. New Zealand’s log exports have increased steadily over recent years and totalled 7.6 million m³ for the year ended 30 June 2002. Of this, Korea imported a record 4.2 million m³ up 30% from the 3.3 million m³ imported in 2001. Sales to China increased substantially over the year (see chart over) creating price tension throughout Asian log markets.

Logs represent 55% of New Zealand’s forestry exports by volume and 23% by value. This will remain a valuable export component, as the domestic processing industry does not have the capacity to process all of the wood harvested in New Zealand. Conversely, foreign processors face decreasing supply from traditional sources and have sunk capital costs in their plants. These factors, combined with low labour costs and tariff structures that favour log imports, provide an attractive environment for New Zealand log exporters. Evergreen will continue to sell into markets which offer the best prices, and in many cases this will entail log exports.

Valuation

As in previous years, the company retained Jaakko Pöyry Consulting (Asia-Pacific) Limited to independently assess the market value of its forest assets as at 30 June 2002. The company’s forest value (net of harvest) increased by $5 million over the last 12-months. Jaakko Pöyry discounts projected pre-tax cash flows by 9% real, assuming some improvement in log prices to 2007, and zero price growth thereafter. The net asset value matrix on page 9 shows the sensitivity of Evergreen’s forest values across different discount rate and real price growth assumptions. Further valuation information is shown on page 10. The latest valuation equates to $0.85 per ordinary share, or $0.78 on a fully diluted, going concern basis (after allowing for a notional conversion of the company’s zero coupon convertible notes and before notional tax provisioning).

Environmental Certification

Evergreen is well underway with the process of obtaining FSC certification. The auditors, SmartWood, completed a scoping audit in May and will undertake a final audit in November 2002. The audit process reviews performance against the ten FSC Principles and Criteria. We are on track to obtain this internationally recognised certification for most of our forest estate by June 2003.

After certification Evergreen will be able to sell its logs with the FSC label, thereby providing customers with an external endorsement of the company’s sustainable management practices. The benefits of certification and the certification process are further discussed in the feature article this year, prepared by our FSC auditors, SmartWood, on page 11. Several key environmental elements that Evergreen is undertaking as a result of the FSC certification process are highlighted throughout the report.

FSC PRINCIPLES AND CRITERIA
 1. Compliance with laws and FSC principles
 2. Tenure and use rights and responsibilities
 3. Indigenous Peoples Rights
 4. Community Relations and Workers Rights
 5. Benefits from the forest
 6. Environmental Impact
 7. Management Plan
 8. Monitoring and Assessment
 9. Maintenance of High Conservation Value Forests
10. Plantations

Summary

With the outlook for world growth mixed, Evergreen has cautiously increased its production while maintaining its emphasis on operational flexibility to maximise shareholder value. The increased focus on the planning, harvesting and marketing operations reflects the maturing of the company’s resource base. Evergreen’s increasing future harvest capacity means the company is well placed to capitalise on the cyclical nature of log markets. The company’s emphasis on pruned logs, sustainable forest certification, and market development will allow the company to pursue high-value niche markets. We will continue to look for incremental investments such as the debarker where such investments provide improved quality and adequate investment returns.

Investors are increasingly focused on real assets and companies with increasing cash flow and these trends should benefit the company. Forestry is a desirable component of a diversified investment portfolio. Evergreen shares offer the opportunity to invest at a discount to underlying net asset value. Finally, shareholders in Evergreen are supporting a sustainable business that contributes positively to the environment which will be recognised by the wider community with the completion of FSC Certification.

Mark Bogle
CHIEF EXECUTIVE
20 SEPTEMBER 2002

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