Brian Gaynor: Great place to work, pity about returns

Carter Holt Harvey's annual report will not revive investor interest in the group.

The document shows operating earnings have fallen yet again but executive salaries continue to rise.

There is little indication that management has a clear strategy to reverse the group's dismal performance.

The report also gives a clear signal that a full takeover offer from International Paper is on the horizon. But first the facts.

Carter Holt's operating earnings (earnings before interest and tax) for the December 2004 year were only $259 million. As the accompanying table shows, this compares with $315 million in the previous year and $346 million in the March 1997 year (the high was $570 million in 1995).

The poor performance has been mainly because of depressed international markets for forestry products, rising shipping costs and the high dollar.

But the group has not taken full advantage of the Australasian building boom and hasn't been particularly successful in Australia.

In the December 2004 year, its wood products division, which has a strong market position in several Australasian building products and operates the Carters chain in New Zealand, reported operating earnings of only $72 million on sales of $1.87 billion, a margin of just 3.8 per cent.

In the same 12-month period, Fletcher Building's products division had an operating profit of $211 million and a margin of 19.3 per cent. Its Placemakers operation, which competes with the Carters chain, reported ebit of $79 million and an operating margin of 8.7 per cent.

As far as Australia is concerned, Carter Holt has made little progress. In the March 1997 year, it had an operating profit of $39 million on revenue of $757 million, a 5.1 per cent margin.

In the latest year, its Australian activities had an operating profit of $49 million on sales of $1.16 billion, a margin of only 4.2 per cent.

Carter Holt's earnings performance has been dismal but its senior executives still received huge salary increases. There seems to be little relationship between performance and reward at the company.

The third column shows that the number of employees paid $100,000 or more has risen from 201 to 891 since 1997.

The total remuneration of the $100,000-plus group has increased from $31 million or 9 per cent of ebit to $145 million or 56 per cent of ebit.

Carter Holt argues that there has been a big increase in its salary structure because it has expanded overseas where pay rates are higher.

Redundancy payments are also included in the figures (total redundancy payments were $20 million in 2004 compared with $14 million in the previous year).

The group has expanded in Australia but its New Zealand operations still represent 64 per cent of sales compared with 78 per cent in 1997 and overseas margins have declined far more rapidly than in New Zealand.

It seemed that the huge increase in salaries had come to an end in 2003 but the latest annual report shows that the number of employees earning $100,000 or more increased again from 810 to 891. Those earning $250,000 or more have gone from 56 to 83 (only 15 were in this salary bracket in 1997).

The latest pay figures are an unpleasant surprise because Carter Holt sold its tissue business for $999 million in May 2004.

As about 1500 employees transferred to the purchaser, and there were no redundancies associated with this sale, it was realistic to expect the number of employees in the $100,000-plus bracket to fall rather than rise.

(In July, a Chinese panel manufacturer, Plantation Timber Products, which employs 1776 people, was acquired for $176 million but this would not have contributed to the $100,000-plus salary figures because it has a low-cost structure and was bought more than halfway through the year.)

The last column is also depressing as it shows the total number of shareholders has fallen from 54,967 to 33,953 since 1997. The high was 68,591 in March 1992 and most of the selling has occurred since International Paper acquired a majority shareholding in mid-1995.

Carter Holt is a great place to work but investors find it far less attractive.

The 2004 annual report indicates that the company is far more interested in cutting shareholder communication costs than executive remuneration as it has moved to lower quality paper and no longer has colour photographs.

The informative Results Review did not appear last year and it has also been left out of the latest report.

But the most disturbing feature is that there is no mention of the dividend in the written body of the report even though this issue is raised at most of the company's annual meetings and is vitally important to individual shareholders.

The only references to dividends this column could find was note 31 to the accounts where the payment of a final dividend of 4c a share is noted and on page 71 where the five-year financial review has a 6c dividend for the December 2004 year.

Most annual reports contain full and clear details of the dividends declared for the year, which in Carter Holt's case was 7c, but the forestry giant only lists the dividend paid during the year.

(Carter Holt paid the final 2003 dividend and 2004 interim during the year, a total of 6c.)

The poor dividend disclosure is another reason for individual investors to desert the company. The report should also have contained more detail on the group's foreign currency hedges and its future strategy.

And why does the annual report give a clear signal that a full bid by International Paper is on the horizon?

Carter Holt Harvey is a celebrated local company. It acquired NZ Forest Products in 1991 and owns some of the country's best-known commercial forests and wood and paper manufacturing operations.

Institutional investors are unemotional but a bid, particularly from an overseas party, would meet strong opposition from individual shareholders. An offer has a better chance of success if individual shareholders own less than 10 per cent as a bidder can move to compulsory acquisition when it reaches 90 per cent.

International Paper's task gets easier by the day as individual shareholders are deserting the company in droves and the holdings of small investors - those owning 100,000 shares or less - has fallen from 11.1 per in 1997 to 9.7 per cent two years ago and is now only 7.8 per cent.

The latest annual report will not stem the mass exodus as the quality and content give little indication that individual shareholders are a top priority at Carter Holt.

As individual shareholders are bailing out and many large investors in the wider vicinity of International Paper's head office in Stamford, Connecticut, believe that timber is one of the few undervalued asset classes, then a bid for Carter Holt is more likely sooner rather than later.

Disclosure of interest: Brian Gaynor is a Carter Holt Harvey shareholder and an executive director of Milford Asset Management.