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Tembec Reports Fourth Quarter Net Loss

Jan. 26, 2006 - [Tembec Inc. today announced that] consolidated sales for the first quarter ended December 24, 2005 were $809.8 million, down from $888.8 million in the comparable period last year. The Company generated a net loss of $74.9 million or $0.88 per share compared to a net loss of $0.7 million or $0.01 per share in the corresponding quarter ended December 25, 2004, and a net loss of $134.9 million or $1.58 per share in the previous quarter. Earnings before unusual items, interest, income taxes, depreciation, amortization and other non-operating expenses (EBITDA) was negative $25.8 million as compared to negative EBITDA of $14.2 million a year ago and negative EBITDA of $3.8 million in the prior quarter. Cash flow from operating activities before changes in non-cash working capital balances less capital expenditures was negative $78.2 million as compared to negative $58.9 million a year ago and negative $39.2 million in the previous quarter.

The December 2005 quarterly financial results include an after-tax gain of $5.2 million or $0.06 per share on the translation of its US $ denominated debt. After adjusting for these items and certain specific items, the Company would have generated a net loss of $90.8 million or $1.07 per share. This compares to a net loss of $73.9 million or $0.86 per share in the corresponding quarter ended December 25, 2004 and a net loss of $127.1 million or $1.49 per share in the previous quarter. The impact of foreign exchange and certain specific items on the Company's financial results is discussed further in the Management Discussion and Analysis (MD&A) of its financial results.

BUSINESS SEGMENT RESULTS

The Forest Products segment generated EBITDA of $17.4 million on sales of $298.0 million. This compares to negative EBITDA of $4.4 million on sales of $300.8 million in the prior quarter. Sales were comparable to the prior quarter with lower SPF prices offset by higher SPF volumes and OSB prices. US $ reference prices for random lumber decreased by approximately US $4 per mfbm while stud lumber decreased by US $18 per mfbm. Currency was unfavourable as the Canadian $ averaged US $0.852, up 2.5% from US $0.831 in the prior quarter. The net effect was a decrease in EBITDA of $5.1 million or $14 per mfbm. Higher selling prices for OSB increased EBITDA by $3.4 million. Margins in SPF lumber were positively impacted by lower processing costs and lower lumber export duties. During the quarter, countervailing and antidumping duties totalled $6.4 million, compared to $18.4 million in the prior quarter. The charge for the quarter includes a favourable adjustment of $9.5 million relating to previously accrued antidumping duty charges in excess of actual cash deposits. Since May 2002, the Company has incurred $316.7 million of duties, which remain subject to the resolution of the softwood lumber dispute.

The Pulp segment generated negative EBITDA of $31.8 million on sales of $313.4 million for the quarter ended December 2005 compared to negative EBITDA of $1.7 million on sales of $323.4 million in the September 2005 quarter. The $10.0 million decline in sales was driven by lower prices in both paper and specialty pulps. While US $ reference prices increased over the prior quarter, currency offset the increase as the Canadian $ averaged US $0.852, up 2.5% from US $0.831. The net price effect was a decrease of $18 per tonne, reducing EBITDA by $9.1 million. EBITDA was also negatively impacted by higher manufacturing costs, primarily driven by higher energy costs and increased production curtailments. Total downtime in the December quarter was 45,600 tonnes, compared to 35,700 tonnes in the prior quarter.

The Paper segment generated negative EBITDA of $12.4 million on sales of $216.3 million. This compares to negative EBITDA of $1.4 million on sales of $230.7 million in the prior quarter. Sales decreased by $14.4 million primarily as a result of lower shipments. The decline in specialty paper shipments relates to the permanent closure of the 80,000 tonnes per year uncoated bleached board machine at the St. Francisville, Louisiana papermill, which occurred in December 2005. US $ reference prices for newsprint increased by US $15 per tonne while reference pricing was unchanged for other grades. However, the stronger Canadian $, which averaged US $0.852, up 2.5% from US $0.831 in the prior quarter, more than negated the improvement in newsprint prices. The net price effect was a decrease of $12 per tonne, reducing EBITDA by $2.8 million. Manufacturing costs were negatively impacted by higher energy costs, which increased by $8.7 million over the prior quarter. Total downtime in the December quarter was 3,500 tonnes, down from 12,700 tonnes in the prior quarter.

OUTLOOK

The relatively poor results were driven by a stronger Canadian dollar, higher energy costs and significant production curtailments in our pulp business. Going forward, we do not anticipate any significant currency relief as the Canadian dollar continues to trade in the US $0.86 range.

The price of purchased fossil fuels, primarily natural gas, reached an unprecedented level in the December 2005 quarter, increasing our costs by nearly $20 million when compared to the same period a year ago. However, since the beginning of January, natural gas prices have decreased and we expect purchased energy costs to be lower in the next quarter.

The pulp business is also improving and we expect that downtime will be significantly reduced in the March quarter.

The primary challenges faced by the industry are the strength of the Canadian dollar and higher chemical, energy and wood costs, particularly in Eastern Canada. These issues are being addressed as part of the Company's aggressive cost reduction program. The recent mill closures as well as the restructuring of our coated paper operations in St. Francisville, Louisiana are expected to improve the Company's future profitability. The Company continues to work for a timely resolution of the lumber dispute with the United States and a refund of monies deposited.

Liquidity at the end of December 2005 was $131 million. While it is anticipated that this amount will be reduced in the March quarter based on seasonal inventory increases and required interest payments, the recently announced sale of the OSB mill for $98 million will contribute significantly to the Company's efforts to maintain the necessary liquidity. As well, focused margin improvement initiatives are underway at a number of facilities, which we anticipate will positively impact the Company's future financial results.

Tembec is a leading integrated forest products company, with extensive operations in North America and France. With sales of approximately $3.8 billion and some 10,000 employees, it operates 50 market pulp, paper and wood product manufacturing units, and produces silvichemicals from by-products of its pulping process and specialty chemicals. Tembec markets its products worldwide and has sales offices in Canada, the United States, the United Kingdom, Switzerland, China, Korea, Japan, and Chile. The Company also manages 40 million acres of forest land in accordance with sustainable development principles and has committed to obtaining Forest Stewardship Council (FSC) certification for all forests under its care.

SOURCE: Tembec Inc.




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