Tenon: Company Reports Steady Operating Earnings

Annual Results To 30 June 2004 Company Reports Steady Operating Earnings

AUCKLAND – Tenon today reported operating earnings from continuing activities, prior to unusual items, of $50 million, compared with $49 million in the previous year.

The highlights included:

• Operating earnings, prior to unusual items and foreign exchange gains, of $41 million - up 37% on the $30 million in the prior year.

• Strong recovery in the second half of the year in both sales prices and volumes to the USA.

• Continued good performance from the Australasian business, reflecting a very strong NZ housing sector.

• Continued growth in the US distribution associated companies whose revenues were up 12% in US dollars.

• Further investment in US distribution with the acquisition of an additional 33% of The Empire Company (Empire), raising ownership to 67%.

• The return of $349 million of surplus capital to shareholders.

Total operating revenue was $556 million, up 41% on the prior year. The majority of the increase came in North American revenue which was up 88% on the prior year to $269 million, primarily due to the consolidation of Empire in November 2003. Domestic revenue was $205 million, up 5% year on year.

Earnings before interest, tax, depreciation and amortisation (EBITDA) and unusual items was $64 million, in line with market guidance. The consolidation of Empire underpinned this result, offsetting shared services costs previously charged to the discontinued Forests and Supply business totalling $6 million, and a reduced benefit from foreign exchange gains. In the 2004 year, gains arising from hedging arrangements designed to mitigate the effect of the strengthening NZ dollar on EBITDA totalled $9 million, compared to $19 million in the prior year.

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Net earnings, before unusual items for continuing activities, were $34 million, an increase of $1 million over the prior year. This represents earnings of 12.2 cents per share, up from 11.8 cents in the prior year. This result was overshadowed by a net loss, after taxation and minorities, of $74 million from discontinued activities, relating to the operating loss, reorganisation costs and forest revaluation of the Forest and Supply segment. Combined with unusual items of $2 million, relating to the Rubicon Forests Limited partial takeover of Tenon, the net loss for the year was $42 million.

Forest Sale Process

The forest sale process is largely complete. The June financial statements include $133 million of discontinued assets relating to the forest sale, which primarily represented the value of non-freehold forest estates for which third party consents had not been received as at 30 June, and the Tarawera land. Since 30 June, the Company has received further consents for the transfer of non-freehold forests to the Kiwi Consortium amounting to $86 million of the $106 million outstanding, and the restructuring necessary to complete the Tarawera land transaction has also been progressed.

Financial Position and Cash Flows

The Company is in a strong financial position, with net cash of $107 million.

Net cash flow from operations prior to working capital movements was $35 million, an increase of $4 million from the prior year, which is consistent with underlying earnings improvements. The Appearance Consumer Solutions division made an additional investment in working capital of $15 million following increased activity, especially at Empire, and higher product prices.

The Company has continued to invest in downstream distribution with the acquisition of a further 33% of Empire and a 20% investment in Danish furniture company Zenia House. The Company continues to reinvest in the New Zealand-based processing operations, spending $12 million in the year to June 2004 on a range of operational improvements, compared with $6 million in the prior year.

The sale of the Company’s forestry assets to Kiwi Forests Group Limited in February 2004 enabled the Company to undertake a capital return of $349 million during the year.

Operating Divisions

Following the forest sale, the Company was reorganised into a functional management structure. The Company’s two operating divisions, Structural Consumer Solutions and Appearance Consumer Solutions each have a distinct market and product focus.

Structural Consumer Solutions

Structural Consumer Solutions produces and markets a range of structural lumber, plywood and outdoor products for use in the housing and commercial sectors in New Zealand, Australia and Asia.

The operating revenue increase of 11% to $251 million was driven by the inclusion of revenue from external log sales, an on-going activity related to the purchase of standing timber but which was previously part of the Forests and Supply segment. There was a 4% reduction in average manufactured product prices, a reflection of demand concentration in the competitive Auckland region, the high NZD/USD exchange rate which turned New Zealand supply away from the North American market and increased domestic supply, and the increase in the volume of lower realisation products sold to Asia. 3

EBITDA of $21 million, up $1 million from the previous year, was underpinned by robust demand. Overall sales volumes were similar to the prior year at 527,000m3, with additional production from the Company’s owned mills substituting for third party traded volume. The EBITDA margin on manufactured product, which excludes EBITDA from external log sales, improved from 9.1% last year to 10.5% for June 2004.

Appearance Consumer Solutions

Appearance Consumer Solutions is expanding from its core focus of producing, marketing and distributing a range of clearwood products for use in the North American moulding sector to a broader range of appearance grade applications in North America and Europe.

An 81% increase in operating revenue to $303 million was impacted by the consolidation of Empire revenues from November 2003. Revenue from New Zealand operations to North America was down 31% on the prior year following the reduced USD pricing in the first half of the year, lower sales volumes and a higher average exchange rate – 63 cents for 2003/04 compared with 52 cents in the prior year. A tightening New Zealand and South American supply placed upward pressure on Moulding and Better lumber prices during the second half of the year, with prices closing at USD1,360/mbf, up from USD900/mbf 12 months ago.

The consolidation of Empire from November 2003 and strong earnings from our US distribution businesses drove EBITDA growth of $14 million to $37 million. However, improved sales prices and tight cost control also provided a step change in performance from New Zealand manufacturing operations in the second half of the year.

With our beachhead investment in Zenia House, the Company is now looking at other potentially attractive opportunities in Europe.

Market Outlook

New Zealand residential housing activity continues to show strength in the near-term. Returns from this market should be maintained as the benefits arising from capital expenditure continue to flow through and offset any slow-down in the second half of the year to June 2005.

North American lumber prices are expected to continue to remain strong with the tight supply from both New Zealand and South American manufacturers not expected to ease in the short term. Solid Lineal Moulding prices, which have been much more stable than lumber prices, are strong but high lumber feedstock prices are creating margin pressure on remanufacturers. Further customer growth will increase revenue from our US distribution businesses.

The Company remains comfortable with the guidance previously provided of EBITDA of $64 million for the 2004/05 year, although it will be difficult to exceed this.

Strategic Priorities

The Chairman of Tenon, Mr Tony Gibbs, said “Looking further out, in a strategic sense, we believe our Appearance Consumer Solutions business will continue to open up opportunities for us. We are currently assessing opportunities to expand this business beyond the current mouldings and clear boards offerings we have into the North American market, and the initial furniture position we have in Zenia House in Europe. While some markets, such as Europe, will clearly take time to assess and develop, we believe potential for attractive growth may exist under wider appearance product offerings.

Similarly, in our Structural Consumer Solutions business we believe we are well placed in the New Zealand and Australian markets. Our position in New Zealand is reasonably mature, but Australia offers good growth opportunities for the Company.

We also see opportunities in the Australasian markets to further expand our product offerings in the structural and outdoor markets – again these product offerings will reflect a migration to higher value and higher margin applications of radiata”.

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