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Report to Shareholders, Operating profit for the six months to 31 st December 2002 increased to $4.27 million (2001: $3.54m). Increased production during this period and satisfactory market conditions (particularly during the first quarter) contributed to this improved result. Current trading conditions are less favourable with the combination of a firmer New Zealand dollar and lower US dollar log prices resulting in softening NZ dollar returns. While this may lead to lower production and lower profit for the second half of the year, we still expect the full year result to be similar to the year ended 30 th June 2002. The company has forward cover protection for expected export receipts at an average rate of US$0.4425 for the six months to 30 June 2003. However, domestic sales are not hedged and, as domestic sawmill customers face declining returns from export sales, lower domestic log prices will result. Sales Revenue of $20.677m was significantly greater than the previous corresponding period ($11.213m). This reflects the company's higher production from its own estate (160,270m3 versus 96,510m3) and an increased contribution from third party sales through our subsidiary, Forestry New Zealand (FNZ). The pricing point for export log sales also has a revenue impact as a higher proportion of the companys export log sales over the past six months were made on a CNF Evergreens strategies remain focused on value enhancement and improving its operating cash flows. Outlook Inevitably world trade markets are volatile when international events are creating uncertainty. These events impact on the levels of confidence in global markets and on the currency, demand and ultimately product prices. This situation will influence the approach we take to harvest planning and the absolute volumes and grades we harvest in the months ahead. We have been establishing a range of trading relationships and, to the extent available to us, we will seek to consolidate these relationships to strengthen our longer-term access to important markets. Evergreen is supportive of industry wide marketing co-operation and will give consideration as to how our participation in recently announced initiatives may benefit the industry and this company's shareholders. Operations Evergreen increased its harvest volume in this period with a higher proportion of lower value unpruned stands being targeted. This change in mix of product results in a lower value yield per m 3 and is an example of how we can access various grades to best match the available market. This is expected to be a regular feature of the company's performance and is consistent with our strategy of retaining some harvest flexibility depending on market conditions. Production is moving from our Northland Forests to South Auckland and it will be these forests that will provide the bulk of our revenue in the next few years. In September 2002, FNZ completed the commissioning of a debarker and anti-sapstain treatment plant at the new Marsden Point Port in Northland. This was foreshadowed in the Annual Report and has already enabled Evergreen to market logs directly into both the USA and China. The quality of the process has been encouraging to date and we expect the facility to be increasingly utilised by other industry participants in the Northland region. Evergreen remains committed to best practice in environmental management of its resource and we have made good progress in terms of achieving external certification for our forests reflecting this commitment. A final audit was completed in November 2002 and we anticipate confirmation of Forest Stewardship Council certification for our North Island forests in the near future.
Funding In March 2003 the Company announced that it had secured a ten year, US dollar, loan facility from John Hancock Insurance Co. (based in Boston, Massachusetts, USA) which has been used to refinance a vendor loan provided in connection with past forest acquisitions. The ten year term of the loan, which carries a fixed interest rate of 6.88%, is much more closely aligned to company's asset profile than the shorter term facilities generally available from the New Zealand market. Subsequent to 31 December 2002, 2.31 million of our ten year convertible notes were converted into 5.5 million shares, effectively reducing our debt by $3.025 million and strengthening the company's financial position. The share buyback has continued to operate on low volume with a total of 311,607 shares purchased between the 17 September 2002 and the end of January 2003. In August 2002, your board cancelled 678,470 shares bought under the previous buyback at an average cost of $0.519/share.
Governance Evergreen has been informed that UBS Timber Investors* has been appointed as the new manager of Xylem Fund I. Xylem Fund I holds 43.33% of Evergreen ordinary shares. The company understands that over the next three months UBS is to undertake a review of the Fund's investment in Evergreen. Valuation Issues The rapid appreciation of the NZ dollar with flat log prices in US dollars has impacted on current stumpage returns. Should the pricing and currency trends continue to be unfavourable it would impact negatively on forest values. Evergreen's forest estate is independently valued each year at 30 June and if a valuation adjustment is necessary it will be made at this time.
In the last report to shareholders, mention was made of proposed new accounting standards that would require the company to report under a mandatory valuation accounting regime, including the provisioning for tax based on a notional sale of the company's assets. No determination has been made to date, but shareholders are reminded that these matters are under review and may impact future accounting disclosures. estate (160,270m 3 versus 96,510m 3 ) and an increased contribution from third party sales through our subsidiary, Forestry New Zealand ("FNZ"). The pricing point for export log sales also has a revenue impact as a higher proportion of the company's export log sales over the past six months were made on a CNF (delivered) basis, relative to the same period last year. For CNF sales, the exporter receives a higher price to compensate for the freight cost incurred. Evergreen's strategies remain focused on value enhancement and improving its operating cash flows.
*UBS Timber Investors is a division of UBS Global Asset Management New York, Inc.part of UBS AG. |
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