Assets

Overview

Hancock Victorian Plantations (HVP) is one of Australia’s largest private timber plantation companies, with estates of approximately 243,000 hectares across Victoria. The company was established following the privatisation of the Victorian Plantations Corporation in 1998. HVP subsequently acquired Grand Ridge Plantations (formerly Australian Paper Plantations) in 2001.

Performance

Net Stumpage Revenue was 3.2 percent above budget for the year to 30 June 2011 and 1.5 percent higher than the previous year despite sales volumes being 0.9 percent below budget. The performance was primarily driven by higher than anticipated log prices.

Customer performance was one of contrast with demand and pricing strong for pulpwood and weak for sawlog. This created challenges for the operational teams to ensure balancing of the forest estate. The structural timber market is one of the major drivers of stumpage revenue being the predominant market for high-quality domestic sawlogs. The market has been sluggish for some time, but has been challenged more significantly over the year.

Customer confidence was negatively impacted over the year due to a large increase in imports from Eastern Europe sourced mainly from Estonia and the Czech Republic. This increase in imports has been assisted by a strong Australian dollar and subdued demand in North America. By securing increased market share in key structural grades through 10–15 percent lower prices than their Australian competitors, there has been an impact on all structural timber suppliers with large inventories building in mill yards, causing extended mill shuts and dropping of shifts in order to balance working capital. This has had an impact on HVP’s stumpage revenue through reduced demand from its saw log customers across all of its three regions. In response to claims by the major processors, the Australian Customs and Border Protection Service initiated an anti-dumping investigation.

Victoria received an unusually large amount of rainfall during January and February, which had the benefit of reducing bushfire risk, but conversely created harvesting and road damage issues. Damaged road infrastructure required replacement or maintenance and additional roading expenditure was provisioned during the year to meet HVP’s winter harvest requirements. The additional roading works were hampered by further wet weather but are now largely complete. HVP’s customers were also affected by the difficult weather conditions, which impacted the local building sector through unexpected delays in building projects.

To capitalise on the favourable pulpwood market conditions, HVP formed a growers’ log export consortium with ForestrySA and Green Triangle Forest Products to aggregate and export pulpwood logs out of Port of Portland. The ability for HVP to aggregate its pulp log volumes with other growers will increase its capacity to access this export market at commercially viable levels. Negotiations are currently progressing with Port of Portland as well as the consortium’s export agent having recently formalised the consortium through a Heads of Agreement.

Legislation to underpin the Carbon Farming Initiative (CFI) was passed by parliament on 23 August 2011 and received Royal Assent on 15 September 2011. The CFI aims to provide recognition and accreditation of land based greenhouse gas abatements by allowing parties to generate government-backed tradeable ‘credits’ from Australian land-based actions that reduce or sequester carbon pollution. Whilst forestry is proposed as one of several land-based abatement activities under CFI, based on its current proposed design CFI offers little to commercial forestry interests and may have little attraction to many landowners. With the support of HVP, the National Association of Forest Industries submitted a response to the federal government’s draft legislation and guidelines for its proposed voluntary carbon scheme. A crucial element to the CFI scheme will be the details of the final rules and regulations, many of which are yet to be released, and its workability is linked to the future policy and regulatory framework around a carbon price mechanism. Reassuringly, under the proposed Clean Energy Future Scheme, there is no carbon price on off-road use of transport fuels in forest management and harvesting. There is also no carbon price on on-road haulage for the first two years.

HVP’s refinancing process in respect of its senior debt facility was completed during the year reaching contractual close in September 2011 following Board approval of the final debt proposal. This process resulted in an increase in the facility amount and a split between three and five year tranches, which will reduce HVP’s refinancing and pricing risk going forward. Reflecting the high-quality of HVP’s underlying business, the process attracted strong interest from all domestic banks with the participation of a further two financiers in the new facility. The final pricing outcome was also better than originally anticipated at the bid proposal stage and represents an outstanding result considering the current credit environment.

Outlook

The end of the financial year to June 2011 position reflected a particularly strong year in the northern region and the export market for pulpwood.

Over the shorter term, persistent poor weather conditions may increase the risk of operational disruption to customers’ woodflow. The structural timber market continues to be under import pressure, due to the high Australian dollar, which in turn is likely to lead to more customers downsizing and reduced orders for HVP. The outlook over the next few months is for a difficult trading period. This will be influenced by the depressed structural timber market.

HVP will continue to pursue a business strategy that strengthens the regional wood baskets in each of its three regions to support a long-term sustainable processing industry. This is largely in response to a projected shortfall in log supply which was compounded by the impact of the Black Saturday bushfires in February 2009. To this end, HVP has been progressing its fire recovery replanting program which is due to be completed in 2015.

Whilst export volumes and price were particularly strong for the final quarter of the financial year, more recently demand from the Chinese market has deteriorated significantly. Whilst this is expected to be temporary, the abruptness of the decline in the export markets is likely to have an adverse impact on HVP’s 2012 financial results relative to plan.

In line with HVP’s land acquisition strategy, HVP is monitoring the sale of various Australian timber estates, which may represent opportunities for HVP to strategically acquire additional timberland. Opportunities include those that have arisen through the sales process being undertaken by the liquidators of Willmott Forests in relation to its MIS assets.

Hancock Victorian Plantations
Financial and operational performance

*CAGR: Compound Annual Growth Rate