ArborGen Holdings Limited (NZX: ARB) (the “Company” or “ArborGen”) today announces that following the strategic review conducted over the past year, ArborGen’s Board of Directors has refocused the activity on its core traditional and fast-growing emerging business. markets in the southern United States and Brazil, as well as new and emerging high-growth carbon markets. In line with this refocused strategy, ArborGen sold its more mature Australia and New Zealand businesses on November 30, 2021 for NZ$22.25 million, significantly strengthening its balance sheet and providing it with greater opportunities to invest in targeted growth areas. Consequently, the Company informs that the strategic review started on June 30, 2021 is now complete.
Top Traditional High Growth Markets – Southern US
Although in the shorter term, the flow effects of the pandemic and geopolitical tensions are likely to impact industry activity, ArborGen’s primary end market, the U.S. real estate market, is supported by very solid long-term underlying fundamentals, namely –
– An underbuilt housing stock in the United States resulting from years of underbuilding since the global financial crisis,
– An aging housing stock in the United States, with the median age of an owner-occupied home now over 40, and
– Strong population demographics with a high proportion of young adults entering the home buying phase.
These strong fundamentals, in turn, support the continued growth in demand for wood products and, in this respect, the southern United States should be the main beneficiary. In addition, problems with wood access and supply have been and will continue to reduce the production of wood products in Western Canada, which has led many of Canada’s major lumber companies to purchase or to build new sawmills in the southern United States. Wood supply problems in Central Europe will also lead to a reduction in the production of wood products in this region. Based on these factors, Forest Economic Advisors predicts that the largest increase in timber production will occur in the southern United States, forecasting a 24% growth over last year’s production to reach 26 .0 BBF* by 2025**.
As the leading commercial provider of proprietary advanced genetics seedlings in the southern United States, ArborGen believes it is well positioned to capitalize on this growth. ArborGen believes it is poised to benefit from more than 20 years of investment in developing best-in-class proprietary MCP products, expanding proprietary genetics offerings and upgrading customers to seedlings. MCP of higher value.
Now that the foundation is laid, ArborGen will focus on continuing to convert customers into higher value seedlings as our customers increasingly see the market potential of our advanced genetic products. In terms of investment opportunities, there is growing demand for the company’s containerized MCP seedlings (our highest value seedlings), and in this regard, the board of directors has approved the capacity expansion in-house ArborGen containerized plants at two existing sites, increasing in-house production 60% from 10 to 16 million containerized plants per year.
ArborGen President David Knott Jr said, “Given the scale of our existing operations, we are able to profitably leverage the infrastructure at our nurseries in Belville, GA and Bullard, TX. , to achieve this growth for less than one million US dollars. The expected benefits of the investment are twofold: cost savings from increased production efficiency and additional margins from the additional volume produced. The expected returns are very compelling, with an expected return on investment of 1-2 years. This expansion should be in place for the FY24 seedling sales year, and we also continue to have a great relationship with our contract container growers. Although ArborGen has sufficient bare root production capacity to capitalize on growth after the trough of the pandemic, the company will continue to evaluate other potential opportunities for expansion in targeted regions. Fortunately, although we are only in the second month of the current year’s harvest season, we have already effectively sold all of our container MCP seedlings and hardwood seedlings, and about 85% of all MCP seedlings. available. »
Traditional High Growth Emerging Markets – Brazil
ArborGen believes that the underlying market fundamentals in Brazil are also very strong, with growing domestic and export demand, new pulp mills and strong charcoal markets resulting from increased demand. of iron ore, now collectively driving strong local demand for eucalyptus and softwoods.
ArborGen has become one of the largest commercial suppliers of eucalyptus and loblolly pine seedlings to the Brazilian market, replicating its US strategy of converting the market to products with superior genetics in Brazil. ArborGen’s continued focus on this emerging market is now beginning to show tangible gains. Consistent with this, and as noted in the company’s FY22 earnings announcement, ArborGen recently acquired an 8-10 million capacity pine nursery located in Canoinhas, Santa Catarina, Brazil for 4 million of BR dollars (0.7 million US dollars), in order to consolidate its position in the local pine markets. Additionally, ArborGen plans to expand its in-house eucalyptus production capacity later this year by leasing its third eucalyptus nursery, which is expected to bring in-house eucalyptus capacity to nearly 50 million plants per year.
Due to much stronger projected prices and demand for ArborGen’s eucalyptus and pine seedlings, ArborGen’s earnings in Brazil are expected to exceed US$1 million this fiscal year (FY23) , significantly higher than the break-even result recorded in FY22, with continued strong growth expected going forward.
Substantial Emerging Global Carbon Markets
There is now clear and growing attention to the importance of reducing greenhouse gases on a global scale, and forests have an important role to play as trees sequester carbon dioxide, one of the main greenhouse gases from the atmosphere and store it in the trunks, branches, foliage and roots.
The growing focus on the role trees can play in offsetting carbon emissions is creating significant new opportunities for ArborGen, with its advanced genetics and strong channels to forest owners in the southern United States, making it uniquely positioned to exploit this opportunity.
ArborGen is a key player in this space and is actively engaged with various carbon registries and major carbon companies, participating in the development of protocols for plantation forestry.
ArborGen CEO Andrew Baum said, “Forest-based carbon projects will play an increasingly important role in creating new demand for pine and hardwood seedlings. Carbon project developers are actively pursuing large-scale afforestation and reforestation projects in the southern United States and ArborGen is actively engaged with several of these companies to supply both genetically advanced pine seedlings and pine seedlings. hardwoods. We plan to supply seedlings in the first year of a multi-year agreement with at least one major carbon company this year. »
Mr. Knott said, “We are very excited about the future of ArborGen. We have refined the business, sold the New Zealand and Australian businesses, significantly strengthened ArborGen’s balance sheet and are now well positioned to grow in our core and emerging markets. To ensure that we realize the Company’s growth potential in these areas, the Board is committed to increasing resources as needed. As part of our strategic review, the board considered all options to unlock value for the benefit of all shareholders, including exploring the potential sale of all shares of the company, but concluded that the unanimously that the best strategy for maximizing shareholder value is to stay the course. We would like to thank all of our shareholders for their continued support, which is greatly appreciated. »
Scope of strategic review
Over the past 11 months, the Board of Directors has considered all options to unlock value for the benefit of all shareholders, from reinvestment to sale. PwC has assessed the interest of a potential sale of all the shares or all or part of the assets of the Company. This process resulted in the sale of the aforementioned Australian and New Zealand businesses. Although a number of expressions of interest were considered for the company as a whole, the board concluded that value would be maximized for shareholders through reinvestment in the company and the growth of the strategy as indicated above.
As part of the strategic review process, ArborGen’s Board of Directors also considered the possibility of a US listing. They concluded that currently the expected costs of listing in the United States outweigh the potential benefits.
* Billion board feet
**Forest Economic Advisors Quarterly Timber Forecast Q2 2022
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