CHH aiming to package a profit

By PAM GRAHAM

In the few paragraphs Carter Holt Harvey allotted its packaging business in its annual results, one said earnings before interest and tax rose 50 per cent on a 2.6 per cent decline in sales.

What gives?

"We've been working hard on margins," said Ian Unwin, the company's Australian-based packaging chief.

Profits knocked to breakeven by competition from Australian billionaire Richard Pratt have been restored by using a simple philosophy: "If we can't make money we don't do it."

When Pratt's Visy arrived in New Zealand in the mid-1990s, upsetting a packaging market comfortably carved up between Carter Holt and Amcor, owner of Kiwi Packaging, customers were starting to buy regionally and were looking to cut costs. Change was inevitable and painful.

"We were inefficient," Unwin said. Carter Holt had 24 packaging plants and tendered for all contracts. Now it has six plants and concentrates on customers willing to pay up for fibre-based packaging especially designed for them. It has dropped plastic packaging and bought two corrugated box plants and a drinks packaging business in Australia.

The packaging division was making about $30 million a year before the industry shakeout. It reported an ebit (earnings before interest and tax) of $27 million on sales of $526 million last year, up from $18 million on sales of $540 million in 2001.

That was a return of 9.3 per cent using CHH's cash-based return on investment measure, compared with 4.5 per cent in 2000.

"We're making most of our money in New Zealand," Unwin said. The Australian businesses, loss-making when bought, are almost at breakeven.

The market shares are high in New Zealand - about 36 per cent in corrugated boxes, 40 per cent in cartons, and most of the big paper bag market for bulk commodities - and as low as 3 per cent in Australia.

"We would love to grow in the Australian market," Unwin said. "Are we jumping in? No, we are not."

Overall, Carter Holt Harvey has threequarters of its assets in New Zealand, but processing businesses making higher returns are in Australia.

Two of four divisional operating officers in the executive team are based in Australia, source of 45 per cent of revenue and home of 27 manufacturing facilities and a third of staff.

Unwin said it was important to understand the Australian packaging market - sooner or later something was going to happen there

He reads competitor Amcor as having a "power of one" strategy in Australasia that puts it in every segment; overseas, it concentrates on three.

But Amcor sources kraft paper from Victoria's PaperlinX in a contractual arrangement that may one day be contested. Visy is privately owned.

Meantime, Carter Holt itself is ignored by many Australian fund managers because its stock lacks liquidity and investors are mindful of low prices in its core log, pulp and paper businesses.

The story of a grind towards reasonable profits is underwhelming. Unwin tells investors about the company's innovative apple box, the design of which has been taken up around the world by 50.5 per cent owner International Paper. It makes the "clam shell" boxes for McDonald's hamburgers and has meat, fish, and kiwifruit customers who appreciate design.

"We have become very good in a number of segments and where we demonstrate we can add value we have been able to put prices up."

Expansion has been equally measured. With turnaround in mind, the company has bought unprofitable businesses. A Tasmanian medium-density fibre board plant bought by the wood products division fitted better with Carter Holt's MDF plants in Australia.

"Everyday we become more of an Australasian business," said Unwin.