UK timber and wood products companies have been reporting upbeat financial results against a tide of weakening economic indicators and recession in the US. However, there are warnings that business will get tougher and the UK timber industry could face debt problems and job losses.

Most experts believe UK businesses generally face more pain next year, despite forecasts that the UK economy will avoid outright recession. The CBI in its recent quarterly survey expects recovery in 2003, hinged on how quickly the US economy improves.

Palgrave Brown managing director Richard Fawcett believes it is difficult to see how the UK economy can ‘defy gravity’. He predicts a weaker second half, but believes the country could ‘avoid the most serious effects of recession’.

Acquisitions have made a large contribution to Palgrave Brown’s upbeat bottom line. Mr Fawcett said: ‘Our Allan Brothers window and joinery business has had a difficult time, but is now coming good and the John Mansfield timber operations at Uttoxeter and Yeovil, which were losing £1m a year, are now going from strength to strength, with I-beams, staircases and joinery doing particularly well.’

Roger Latham, chairman of James Latham, said the com-pany achieved excellent sales in October 2001, in part from the opening of two depots. He added that, although the customer base was generally busy, uncertainty over the economy meant it remained to be seen how long this would continue. Turnover for the nine months was up 2% to £42.9m.

Builders merchants have continued to record strong sales growth. The Builders Merchants Federation said third quarter turnover was up 8.4% but, with the property market looking nervous, growth was mainly in repair, maintenance and improvement.

Travis Perkins‘ half-year profits were up 18% to £52.3m from increased activity in home improvements, and the company believes consumer confidence, supported by falling interest rates, remains robust.

Heiton Holdings enjoyed another buoyant year with group turnover up 15.8%. But chairman Richard Keatinge also warned of pending slowdown. He said conditions in various markets were less favorable than in recent years, forcing tighter net margins, and the company was reducing its cost base and containing investment.

Rising debt

Almost half of the UK timber products industry increased its debt this year and one in four used it to finance growth, according to business information publisher Plimsoll.

‘Taking other people’s money and using it to generate a profit is great in the good times. The dilemma is that they will need to keep charging a price premium to finance the debt,’ says Plimsoll senior analyst David Pattison.

In its Portfolio Analysis of the top 1,000 UK timber companies, Plimsoll said there were fundamental business problems beyond the economic uncertainty.

Employee costs far outweigh the sector’s ability to pay, Plimsoll said. In the last three years the cost of employing people increased 18%, yet sales rose by 11%. Average salaries are expected to rise next year by 3.5% to £19,862 from £19,186.

In Continental Europe, the talk has been of overcapacity and low prices exacerbating weak economic conditions.

The Swedish/Finnish giant Stora Enso admitted that continuing weakness in the markets, combined with seasonal curtailments and planned downtime for rebuilds, will hit fourth quarter earnings.

The company said it would continue to adjust its capacity to market demand and said full-year financial results will depend on boosting prices and the company’s internal costs and efficiencies.

Profits for the nine months were down 40% from a year ago, mainly because lower prices and sales volumes outweighed the benefits of cost reductions and weaker exchange rates.

Södra acquisition

Södra, whose nine-month profits were off more than two-thirds, increased its involvement in sawn timber with the acquisition of shares in sawmiller Jabo Traprodukter.

CEO Anders Wahrolen said: ‘The acquisition will increase our potential to participate in the development of the sawn timber sector. Jabo has an interesting line of consumer products with a good market growth. Our results were affected by the downturn in the economy and falling pulp prices as a result of reduced demand.’

&#8220Although there is optimism of a deal in the softwood lumber duty dispute between Canada and the US, the tariff has put four Canada companies further into the red with a US$30m bite out of third quarter figures”

AssiDomän, whose profits also fell sharply in the third quarter, is under a friendly offer from Sweden’s state-owned forestry company Sveaskog. It has made a US$1.5bn offer to buy the outstanding shares in a move it says would improve management of the timber market and preserve the country’s natural resources. The deal would give Sveaskog 18.2% of the country’s timberlands.

In North America, companies lamented the affect of the terror attacks on top of an economic slump and overcapacity. Although there was some firming of prices, these were measured against cutbacks in production.

Georgia-Pacific helped create the country’s largest pure timber investment firm with the US$4bn merger between Plum Creek Timber Company and Georgia-Pacific’s The Timber Company. Plum Creek, a real estate investment trust, now owns 7.8 million acres in the main timber-growing regions of 19 states and nine wood product mills in the north-west.

But Georgia-Pacific said prospects for its core timber businesses remained subdued. Third quarter earnings were off by a third, but the cost of selling its pulp and paper facilities to Domtar Inc left a loss of US$182m.

CEO Pete Correll said: ‘We anticipate demand in the building products segment continuing to decline during the fourth quarter. As a result, we are not optimistic about prospects for improved prices in our struc-tural panels or lumber businesses. We have already taken downtime at several plywood plants and sawmills this quarter.’

Louisiana-Pacific Corp, the giant US house building and timber products company, reflected much of the action in the timber, forestry and timber products sector by renewing cost-cutting in the face of third quarter and nine-month losses.

LP lost US$2m on sales of US$636m for the last three months, but without exceptionals would have lost US$14m.

The continuing weak markets for LP’s products and the economic uncertainty caused nine-month losses of US$92m on US$1.8bn sales, compared with profits of US$60m on US$2.4bn sales in 2000.

LP has since cut 160 mid-to-high level corporate positions, introduced a salary and wage freeze, cancelled management bonuses and reduced administrative costs. This is expected to trim US$30m a year.

Stronger position

Mark Suwyn, LP’s chairman and CEO, said: ‘These actions, in addition to those taken earlier in the year, will strengthen LP in the face of a slowing economy and better position the company for when market conditions improve.’

But he added: ‘While we are cautious about the next several quarters, we anticipate an improved operating environment in the second half of 2002 and into 2003 as the fundamentals driving increased demand for housing have not changed.’

Although there is optimism of a deal in the US softwood lumber duty dispute between Canada and the US, the tariff has put four Canadian com- panies further into the red with a US$30m bite out of third quarter figures.

Dispute costs

Slocan Forest Products, Riverside Forest Products, International Forest Products and West Fraser Timber have set aside money for the 19.3% duty with an additional 10% anti-dumping duty, but the US$30m is thought to be just the beginning of the cost of the lumber dispute.

One analyst said: ‘That’s a quarter of a billion dollars a year at least from these four companies alone.’ Only a 50% reduction in the provincial corporate tax rate prevented the companies’ results from being darker.

The countervailing duty, lower North American OSB prices and European panel prices offset improvements in paper at Nexfor, where profits were down US$4m.

CEO Dominic Gammiero said: ‘Our priorities will continue to be cost controls, production efficiencies, minimising working capital and maintaining a strong balance sheet to further grow Nexfor’s core business.’