Forestry Tasmania the stumbling block

FT’s Managing Director Bob Gordon was recently reported in the Mercury HERE as saying, in explanation of FT’s current woes, “(w)e hit an iceberg 18 months ago, we have repaired it and we are back on track again but it is just a matter of how long it takes to see the result on the ground.”

Eighteen months ago, that’s November 2008.

At the Estimates Hearing on 3rd December 2008 HERE the following exchanges took place between Mr Rockcliff and Messrs Gordon and Kloeden from FT.

Mr ROCKLIFF – Minister (talking to Mr Llewellyn), is Forestry Tasmania aware of any concerns of its customers - and I know one - either domestic or overseas, and the extent to which they may be adversely affected by the global financial crisis? Have you done any assessment on your customers and the impact that will have on FT in the next 12 to 18 months?

Mr KLOEDEN…..... we are not looking to reduce financial performance in the current year that we are operating in right now, as a consequence of that. .......So, overall last year, some ups and some downs. Coming into this year we do not expect that to adversely affect our financial performance.

Mr ROCKLIFF (later referring to the softwood Joint Venture with GMO) - So you are expecting operating revenue to increase over the next 12 months?

Mr GORDON - Correct. It has already increased in the year to date, and I expect that to increase.

No iceberg was mentioned.

A year later, Bob Gordon said in a Media Release that the 2008/09 bottom line “was a solid result, particularly given the challenges of the global financial crisis”.

“So far Forestry Tasmania has been able to insulate its contractors from the worst effects of the downturn,” he said.

Again no mention of any iceberg or the repairs carried out on the SS FT.

FT gets away with public utterances and reports which would raise more than a few eyebrows if it were a listed company. Gunns is a model of truth and transparency by comparison. It makes it a little difficult at times to work out what’s going on, trying to understand the details of FT’s P&L.

Mr Kloeden for instance is not too keen on the measure of Net Profit which every listed company uses, preferring instead a measure of net operating profit which excludes any costs of harvested timber. As he told Estimates on 3rd December 2008, “a better measure of how we are travelling is the operating profit or loss and I am pleased to say that we have never, since corporatisation, made a loss.”

But that is now about to change according to Bob Gordon in his Mercury interview.” I expect we will probably make an operating loss for the first time since corporatisation, “he said.

That’s catastrophic.

Lest any reader thinks the above is an esoteric accounting sideshow, let me explain.

Every time a tree is sold provided it’s sold for more than harvest costs, net operating profit will increase. Not only native forests, but plantations as well. Most people would simply assume that when revenue from a plantation is included so would offsetting plantation costs, so that a net profit figure could be derived from that activity.

But that’s not the way FT does it. Mr Kloeden is happy that the best measure of FT’s profitability is the net operating profit figure which excludes costs of timber sold. As the House of Saud extracts the last drop of oil, as the last stick of native forest is felled, Mr Kloeden will still be able to maintain an operating profit was achieved. The most uneconomical plantations could be sold, and there could still be a net operating profit. “...a better measure… is the operating profit”, says Mr Kloeden.

Capitalise the costs of the trees but include the proceeds as income. A sure fire recipe for continual operating profits. At least until this year.

This is one of the problems in the forests debate. Mr Kloeden’s strange concept of net operating profit defies logic and common sense by excluding the costs (losses) of the very assets he is entrusted with protecting. It’s not a P & L that can be used to measure either accounting or sustainable profits. It’s just a convenient PR measure of profits.

And it hinders rather than assists a resolution of the inevitable dilemma that results from parking native forests with non-forest values inside a GBE.

A precursor to any discussions at the proposed Roundtable about reform surely must be an analysis of the current situation. A thorough analysis. Similar to what a Voluntary Administrator would prepare if appointed to a struggling Company. It’s got to be a little better than FFIC’s New Forestry Plan. Most credible plans will attempt an analysis of the past before attempting to outline a future course of action. The description of the past in the New Forestry Plan was skimpy and the analysis non-existent. No mention of any icebergs either.

 

What about Private Forests Tasmania (PFT)? Missing in action? Every year the Auditor General reports to Parliament on PFT and wryly reminds Parliament of the Authority’s Strategic Plan which states, inter alia, “the objectives of the Authority are to facilitate and expand the development of the private forest resource in Tasmania for commercial purposes and to maintain a healthy and productive rural environment in a manner which is consistent with sound forest land management practice.” The A-G must be wondering like many others, about the chasm between PFT’s lofty goals and it’s on ground performance, if the current state of play is any measure. PFT should have a detailed analysis of our current situation, surely? Some lessons it can pass on? At least some observations about failed MISs which it has witnessed at close quarters perhaps?

Private growers account for roughly 40% of wood supplied to the market. The other 60 % comes from FT. FT has got to start putting a few more numbers on the table so we can all see the problems we’re expected to reach into our pockets to help solve. It not enough to talk about icebergs 18 months after the event. Show us the numbers.

The information emanating from FT is scarcely sufficient to chart a course for the future. As mentioned above the operating profit is misleading. And in 2009 they abandoned the provision of segment information which assists in understanding financial statements. The A-G has since suggested they reconsider.

GBEs don’t release midyear financials like listed companies so they remain below the radar for a full 12 months.

The plethora of media releases from FT rarely refers to financial information. They’re simply responses to the intense pressure from opponents. To some extent its behaviour is an understandable reaction but increasing symptoms of paranoia suggests it must be nearing a clinical stage requiring treatment.

But meanwhile it’s the key player in the forest industry.

The annual financials come under very little scrutiny, only 3 hours of Estimates hearings each year. The Leg Co made some progress in 2009, much better than the previous year when the combatants downstairs had a fling. To his credit Mr Rockcliff appeared to be the only one who had read the financials and about 5% of the allotted time was spent on matters financial. The rest of the time Mr Gordon and Mr Booth snarled at one another. Mr Best and Mr Booth did likewise. Mr Best practised honing his Speakership skills. All to no avail it now seems. Mr Llewellyn, the Master Filibuster, the Stonewaller par excellence, made sure that as much of the 3 hours was as wasted as possible. Ms O’Connor’s overarching concern for the welfare of the swift parrot precluded any questions of a financial nature. She gave no hint she’d even read the financial report let alone understood it. All up, not a particularly edifying effort. What was achieved? Very little.

It’s time we learnt a little more about FT.

What makes up their bottom line? What is the composition of forest sales? FT’s Sustainability Report contains details of quantities by log type and mill door value, but they’re all lumped together in the financials. And in any event sometimes FT charges for harvest and freight costs (included with forest sales), sometimes not.

The Auditor General’s Report to Parliament HERE contains some analysis of the sales breakup but he talks about % and $ movements not actual $ and quantity amounts. Commercial in confidence I suppose.

The table below is a best estimate of FT’s P&L for 2008/09 splitting the ‘forest sales’ into categories referred to by the Auditor General.

FORESTRY TASMANIA 2008/09
	$ m	T '000	$ per T
RECEIPTS
Pulpwood	35.6	2,100	16.95
Sawlog	11.9	300	39.67
Te Ann Peeler	7.7	190	40.53
Export	4.5	100	45.00
Other	4.1	50	82.00
TOTAL STUMPAGE	63.8	2,740
Harv/Cartage/Tolls	73.0
Share GMO JV	18.5
TOTAL FOREST SALES	155.3
OTHER INCOME
Interest received	2.2
TCFA Operating Grant	3.5
Other Govt Grants	3.5
Forest Management services	7.6
Tourism	2.6
Other	8.0
TOTAL INCOME	182.7
EXPENSES
Contractors	88.3
GMO Expenses	15.7
Other Expenses	22.2
Deprececiation & Amortisation	14.3
Employee benefits	29.9
Interest paid	3.0
TOTAL EXPENSES	173.4
NET OPERATING PROFIT BEFORE TAX	9.3
CAPITAL PAYMENTS
New plantings	12.1
New roads	12.3
Other capital	5.8
TOTAL CAPEX	30.2
Less TCFA Capital Grant	-9.5
CAPEX FUNDED BY FT	20.7

As a general rule ‘harvesting cartage and road tolls’ comprise 50% of ‘forest sales’, in this case $73 million. Stumpage amounts for hardwood ‘pulpwood’ ($35.6 m), ‘sawlogs’($11.9 m), ‘Ta Ann peelers’($7.7 m),’ export logs’($4.5 m) and ‘other’($4.1 m) together with a share of revenue from the softwood Joint Venture with GMO ($18.5m) make up the category of ‘forest sales’, which totalled $155.3 million.

Other income of $27.4 million included government grants, interest, forest management service income, and tourism proceeds.

Total income was $182.7 million.

Expenses of $173.4 million resulted in net operating profit of $9.3 million. Included were ‘contractor expenses’ of $88.3 m, GMO JV expenses ($15.7 m), depreciation ($14.3 m), and employee benefits of $29.9 million.
The salient features are

1. Hardwood stumpage was only $63.8 million. Of this 56% or $35.6 million was pulpwood, almost all from native forests. On a quantity basis 80% of timber or 2.1 million tonnes was pulpwood. The average royalty rate was about $17.

2. The $35.6 million for pulpwood sales was not all clear profit to FT. The costs of logging roads aren’t included, they’re capitalised. Nor are the costs of tidying up and replanting. And if the Police Dept sent them a bill for security services that would just about clear the cash tin.

3. The balance of timber, almost all from native forests yielded $28 million from 600,000 tonnes.

4. Contractor expenses were $88 million but only $73 million was recovered from harvesting and carting to the mill door. The difference was presumably maintenance work on the forest estate, fire fighting activities etc ?

5. The Joint Venture with GMO produced only $18.5 million of income but $15.7 million of expenses. The latter excludes replanting costs. Sustainable? Profitable?

6. FT has done a good job of keeping about 500 on the payroll of $30 million, about $60,000 each, not overpayments by any means. But the income is shrinking. After the initial success of Tahune, the ensuing tourist ventures have struggled. Income from forest management services appears to be declining, although it is not clear what FT’s arrangements are with third parties. Mr Gordon recently referred to a loss of rent from FEA so presumably there are arrangements with them. But any others??

7. Government operating grants were $7 million. In addition TCFA capital grants of $9.5 were spent, on a specific purpose basis.These do not appear in the P&L statement.

8. Gunns accounted for 56% of FT’s forest sales in 2009, with Artec (another woodchipper) at 11%, Ta Ann 10% and Norske Skog 6%. The majority of the JV GMO sales went to FEA.

It will be interesting to see this year’s figures. Hopefully the Roundtable will be indulged. It should be responsible Minister Green’s first task.

Figures from FT, the missing link, together with already known figures from Great Southern, FEA and Gunns will help complete a bit more of the picture puzzle of the Tassie forest industry. The contractors have presumably bared all in their requests for assistance, now it’s FT’s turn.

Once the peace pipe has done a lap of the Roundtable, what then? The Chair needs to be an independent person akin to a Voluntary Administrator (VA), not someone who has overseen the current mess. Someone to look at the whole industry and give a fresh view of the numbers as he sees them and report back within say 2 weeks to indicate which bits contribute what and which bits will require what to survive. And then it’s over to the Roundtable to proceed from there. There may be a common desire to stop brawling, but there are such widely diverging views about our current situation. FEA’s VA took 5 minutes to decide that FEA was hopelessly insolvent with a flawed MIS dependant business model yet chief industry spruiker Mr Chipman still claims FEA is a solid Aussie Company white anted by greedy self interested banks. That’s quite a difference. It’s not something one can merely agree to disagree about. Establishing a firm basis for the future requires a little more.

And that future has to seriously entertain the breakup of FT and PFT. What functions are best administered by a GBE? Plantations, OK. Can’t think of anything else. It’s always going to lead to conflicts having assets with non forest values in a GBE which has a focus on net operating profit which can simply be increased by selling a few more trees. All the Community Service Obligations (CSOs) which Mr Gordon rightly claims restricts FT as a GBE, need to be removed. Tourist ventures as well.

And while you’re at it perhaps do a draft review of the TCFA.

Under the TCFA the State and the Feds agreed to contribute $221 million of funding for specific activities including the establishment of new hardwood plantations and research and development activities.

As at 30 June 2009 FT had receipted $135 million of TCFA funds. Expended amounts as at 30 June 2009 were $95 million, resulting in a TCFA unspent cash balance of $40 million at 30th June 2009.

But FT had started to dip its paws into this honey pot to cover its ordinary operating expenses. The A-G reminded FT he was watching and that any amounts would have to be repaid and spent on stipulated activities.

Hopefully this has occurred. Under ordinary circumstances we’d wait until 31st October to find out, and to discover how FT has managed its cash flow when the opening cash position looked a little shaky and net operating profits since has been negative.

The major investing activities funded to date through the TCFA totalled $95 million at 30th June 2009 and were:

·        additional plantation management $41 million

·        existing plantation upgrades $19 million

·        road infrastructure $16 million

·        additional native forest thinning $4 million

·        support for clear felling reductions $7 million

·        support for special species $4 million

·        other tourism, nursery, bio-energy $4 million.

As at 30th June 2009, there was another $86 million of TCFA grants yet to be received and almost $40 million sitting in FT’s bank account.

But has all this expenditure put the industry on a firmer footing? It appears to have helped FT maintain a high level of employment. But more sustainable?

Only 3 months ago FFIC declared in their blueprint that “sawing trials have concluded that E.nitens plantation stock is unsuitable for, and uneconomical as, a source of wood for appearance grade sawn products. This is because of the considerable degrade associated with the seasoning process (in particular, surface checking and unrecovered collapse). .............. Unless these challenges (associated with processing plantation timber) are overcome, a large proportion of the current Tasmanian hardwood production industry is unlikely to be able to profitably or sustainably process plantation sourced logs into high grade products.”

Mr Edwards from FIAT reported at HERE agrees that the industry “has yet to find a way of growing plantation timber of sufficient quality for high-value furniture and flooring.”

Ten years of wasted opportunities. Ten years spent carpeting farms with nitens then searching for an end use. Ten years of neglect of longer rotation plantations.

But at least there’s a glimmer of hope.

Unfortunately not as yet from FT.