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Management Side
Technical Side
Tenon
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Auckland, New Zealand, 16 June 2008 – Tenon, a wood products processing, marketing, and distribution business, gave the following operational update to the market today.

Market Conditions
In its Interim Results, Tenon stated that it would be proceeding “on the basis that market conditions would remain very difficult for the balance of our 2008 fiscal year.” This working assumption has proved to be the case, and the usual spring-lift in market conditions in the United States historically weighted the company’s financial results to the second half of the fiscal year has not occurred this year. A longer winter and late spring have exacerbated the difficult housing market conditions the sector has been experiencing. In addition, the NZD:USD exchange rate, which averaged 75.5 cents for the first fiscal six months, has strengthened further to average 79 cents for the five months to May of the second half of the fiscal year. Comparing fiscal 2008 to date (i.e. up to the end of May this year) with fiscal 2007, the average exchange rate strengthened from under 69 cents to around 77 cents. As every 1 cent increase in the NZD:USD exchange rate is equivalent to approximately USD 750,000 in lost operating earnings, all other factors being constant, this strengthening has negatively affected the company's earnings year-on-year by approximately USD 6 million in EBITDA.

Cost Initiatives
Although the U.S. housing market conditions and NZD:USD exchange rate are beyond the company's control, Tenon has put in place several key initiatives to address the controllable factors in its business. Tenon has advanced a “one company” platform (OCP) during the period, with the completion of the integration of the back office operations of Empire and FWS being just one example. As a result of a series of clearly identified OCP initiatives of this type, the company is confident that it is on target to achieve its goal of USD 5 million of annualized OCP savings over the next two years. In addition, over the last 12 months, Tenon has optimized its supply chain to match market demand, and reduced overall employee levels by 13% to just over 1200 people. This reduction in workforce has been completed with no degradation of the company's critical success factor: best-in-class service to its customers.

Organic Growth
The initial roll-out of Armour Wood and LIFESPAN – Tenon's emerging outdoor products – have been affected by the U.S. housing downturn, but despite those conditions the establishment of these brands is now advancing well. Armour Wood, the company's exclusive outdoor brand for Lowe’s, is now present in 150 Lowe’s stores, with an agreed further roll-out plan in place.

Overall, the outdoor segment is four times the size of Tenon’s traditional moldings category. It offers a considerable scope to build a strong growth platform around treated wood products for outdoor use, which will generate significant future earnings and value benefits for the company.

Earnings Update
Taking all these factors into account, Tenon's current expectations are for earnings before interest, tax, depreciation, and unusual items (i.e. EBITDA pre-unusuals) for the 12 months to 30 June 2008 to be in a range of approximately USD 16-17 million. This is in line with current market expectations, and represents a very good performance given the difficult prevailing operating environment and the relative performance of Tenon’s competitors.

Debt Reduction
The company has made excellent progress with its working capital management, particularly in terms of adjusting its inventory levels to the lower level of market activity currently being experienced, while also ensuring that it meets customers’ high order-fulfilment requirements. This focus, combined with strong cash generation across the company, should see Tenon's net interest bearing debt (including all deferred liabilities and mortgages) fall from USD 88 million at 30 June 2007 to around USD 75 million by 30 June 2008.

From 01 July 2008 (the beginning of the new fiscal year), Tenon's debt levels will be able to be significantly reduced even further, through the inclusion of some of Tenon’s operations within a supply-chain financing program sponsored by the Bank of America. The program will allow Tenon the opportunity to receive payment from Bank of America for a large portion of its receivables well in advance of normal customer credit payment terms.

Tenon’s bank syndicate has approved Tenon’s entry into the program, on the condition that the bank facility size is reduced by USD 20 million, reflecting the approximate debt reduction expected to result for Tenon from its inclusion in the program. As Tenon’s goal has been to operate to a lower level of debt (and therefore to a lower use of total facilities) through this point in the business cycle, this requirement is consistent with the company's intent and has been agreed to.

Under the program (which is nonrecourse to Tenon), Tenon will receive 100% of the face value of the receivables bought by Bank of America, less a financing fee that will represent the interest cost for the early receivables payment. As the program has a higher credit rating than Tenon’s bank facility, the program is an economically attractive initiative for Tenon. The company said it would next update the market on its performance and operating conditions at its full-year results release in August.

 


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