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Your Directors are pleased to report a further improvement in earnings in the year to 30th June 2002. Net Surplus increased to $6.746 million (2001: $5.044 million) while forest values were maintained in excess of capitalised book values. The improving trend in the second half of calendar year 2001 was impacted by events in the USA and the trading uncertainties that followed. We also experienced a short-term reduction in the price for pruned production and a strengthening of unpruned values with stability more evident in the last quarter of this last financial year. Evergreen’s ability to match its harvesting to market conditions provided a cushion to these changes, delivering a year on year result of improved earnings. Investments Investment in young forests (including funding costs) totalled $9.8 million in 2002 (2001: $9.4 million). The high cash costs of establishment of younger forests is largely behind us now and while some further investment is required, operating cash flows (based on prospective increased harvest volumes) are forecast to increase significantly.
Funding Our policy of looking to improve our debt structure has continued this year. We bought back and cancelled 4.275 million convertible notes in July 2001 and a further 2.267 million notes were converted into ordinary shares this year. The effect of these transactions has been to reduce debt and increase equity. The share buy back programme has operated for much of the year on low volumes and has recently been extended to August 2003. It will now include the buy back of convertible notes. These are modest measures but signal our intention to continue to move to an improved matching of debt to cash flows. Since balance date we have renegotiated our Bank loans, extending the term to 5 years. The facility now includes funding to enable repayment of a vendor loan due in 2004. Shareholder Returns Our stated intention has been to achieve improved value recognition in the share price. That was achieved this financial year although recent prices reflect current sector sentiment. While we would acknowledge there is still much to be done, our focus on maintaining the development of a valuable resource, coupled with strong future cash flows, indicates a more mature phase has been reached. Directors do not propose that the Company should pay a dividend this year. We remain convinced that the most rewarding yield will be to ensure growth in share value and with future rewards resulting from much improved operating cash flows. Shareholders have received earlier written advice of the company’s share and note buy back intentions. Valuation Accounting Shareholders need to be aware that the Accounting authorities are proposing a requirement to move from historical cost accounting to valuation accounting for forest crops. This will see Evergreen’s forests revalued each year with any movement in forest values recorded through the Statement of Financial Performance (profit and loss account). In addition, our Auditor’s advice is that, consistent with the proposed change in the accounting standard, tax should be provided in the accounts (net of deductions carried forward) on a notional sale of all of the Company’s assets. Evergreen has no intention of selling all of its forest assets nor do we anticipate any situation where that may happen. Our practice has been to note independent valuation assessments on an annual basis and adjust carrying values if required. The provision for tax on something that is not in the company’s contemplation and its reflection in earnings reports will constitute a change that may well be evident in next year’s accounts. Industry Outlook Last year I identified a number of challenges to be met by our industry. I expressed confidence in our ability to move forward and acknowledged the regional development initiatives of Government. While the last year has seen progress in advancing the regional development concepts and these appear to have been embraced by local authorities, there has been a less than adequate acknowledgement of the very important role this industry has in New Zealand’s economic development. • Investor perceptions are very important for our country and its capital demanding industries. We need long term investors who have confidence that New Zealand will achieve economic growth at least as high as alternatives (particularly Australia). Much greater investment in research and development, strong leadership in creating a productivity and value culture are clearly needed if the pivotal export sector is to optimise its capacity. Evergreen supports advocacy for this direction. • Kyoto Protocol: While we must seek to achieve the desired outcomes for environmental management, to nationalise assets in the form of carbon sequestration credits when investors have made decisions in the knowledge that such benefits would accrue to them, is very short sighted. Responsible industry will invest to achieve best practice. To deny the asset and to impose costs that will disadvantage this country and its private capital investors, is an act of dogma rather than reason. We will continue to support the Kyoto objectives but oppose the Government’s suggested adoption plan. • Evergreen remains committed to environmental best practice. We are well advanced in securing FSC certification for our forest estate that confirms we manage them on a sustainable basis. We have also retired 500.4 hectares of land for natural regeneration with covenant protection to ensure its preservation. • There has been new investment in forest ownership by offshore investors and signals by others that processing capacity will be created to utilize the increasing flow of manufacturing grade wood. Further infrastructure investment by port companies and internal transportation and logistic companies is evident and this will enhance the efficiency in the logistic chain from forest to consumer. • The further emergence of China as an important market for New Zealand forest products is pleasing as is the continuing demand in Korea. The New Zealand industry must coordinate its efforts in these, and other markets, to ensure we optimise the opportunity they represent. • The need for our industry to continue to ensure good corporate performance and corporate behaviour remains an essential goal as investor confidence is fundamental for both domestic and offshore investors. This can only be delivered by sustained good performance. There is a role for Evergreen to be an active contributor and commentator on what we see is good for the sector and for the New Zealand economy. We will continue to communicate our views in a constructive manner. Evergreen Outlook We have the capacity to access increased harvest volumes and have invested to enable an early response to changing market conditions. Our marketing and trading subsidiary, Forestry New Zealand has been restructured and its resources increased. We expect that this subsidiary will contribute positively to earnings in this and future years. We have invested in a debarker facility at the Northland Port that will enable improved quality control and presentation of product to domestic and offshore end users. We have been active in our efforts to extend investor interest in our company as a means to fund expansion and progress is being made. Funding arrangements have been extended and restructured to better match harvest cash flows. We are well through the major investment needed to create excellent forests for our future. That is a good level of achievement in your Board’s opinion and these strategies will continue in the year ahead. Directors We have been advised of an intended change in manager of the US based Fund which is a major investor in our Company. Pursuant to that change, Stephen N. Hurley and Roy M. McCluskey have resigned as Directors. Following the appointment of the new manager to the Fund, we expect to address Director representation. Acknowledgement Your Board acknowledges the contribution of the Xylem Investments’ board representatives over the last 7 years. The energy and enterprise of our management team is also acknowledged. The Company has expanded its administrative and marketing staff to reflect the increased role now required to manage the harvesting and marketing of greater production volumes.
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We remain committed to the intensive management of our forest estate to produce high value clearwood on appropriate sites. While this policy does require additional investment in silviculture, we hold the view that there will be increasing value recognition for clearwood through its application in high end-value products for discerning markets.
