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Tembec Reports Third Quarter Loss on Newsprint, Lumber Sales

Nov. 18, 2009 - Tembec reported consolidated sales for the three-month period ended September 26, 2009 were $451 million, down from $629 million in the comparable period of the prior year. The Company generated a net loss of $17 million or $0.17 per share in the September 2009 quarter compared to a net loss of $4 million or $0.04 per share in the September 2008 quarter. Earnings before non-recurring items, interest, income taxes, depreciation, amortization and other non-operating expenses (EBITDA) was negative $9 million for the three-month period ended September 26, 2009, as compared to EBITDA of $29 million a year ago and negative EBITDA of $42 million in the prior quarter.

For the fiscal year ended September 26, 2009, sales were $1.8 billion as compared to $2.4 billion in the comparative 12-month period. The Company generated a net loss of $214 million or $2.14 per share compared to a net loss of $102 million or $1.19 per share in the five-month period ended February 29, 2008 and a net loss of $48 million or $0.48 per share in the seven-month period ended September 27, 2008.

BUSINESS SEGMENT RESULTS

The Forest Products segment generated negative EBITDA of $5 million on sales of $105 million. This compares to negative EBITDA of $18 million on sales of $72 million in the prior quarter. Sales increased by $33 million due to higher prices and volumes for lumber, as well as higher by-product volumes. US $ reference prices for random lumber increased by approximately US $22 per mbf while stud lumber increased by US $37 per mbf. Currency had a negative effect on pricing as the Canadian $ averaged US $0.910, a 6% increase from US $0.858 in the prior quarter. The net price effect was an increase in EBITDA of $5 million or $27 per mbf. Mill level costs decreased by $11 million due to a combination of lower fibre costs and higher operating rates. Although lumber demand remained relatively weak, shipments were up 41% over the prior quarter. During the September quarter, the Company recorded a favourable adjustment of $2 million on the carrying values of log and lumber inventories. In the prior quarter, the Company absorbed a charge of $2 million related to a reduction of the carrying values of logs and lumber inventories.

The Pulp segment generated EBITDA of $8 million on sales of $276 million for the quarter ended September 2009 compared to negative EBITDA of $22 million on sales of $239 million in the prior quarter. Sales increased by $37 million primarily as a result of higher volumes and selling prices. US $ reference prices increased by US $80-90 per tonne over the prior quarter, as pulp markets and demand improved. Currency had a negative effect on pricing as the Canadian $ strengthened versus the US $. The net price effect was an increase of $13 per tonne, improving EBITDA by $5 million. While pulp demand improved, the Company only operated two of its three high-yield pulp mills, unchanged from the prior quarter. Overall, the Company incurred 55,700 tonnes of market related downtime and 20,900 tonnes of maintenance downtime in the September 2009 quarter. This compares to 86,200 tonnes of market related downtime and 1,300 tonnes of maintenance downtime in the prior quarter. Despite higher maintenance costs, overall mill costs declined by $12 million due to lower fibre, chemical and energy costs. Current quarter margins were also positively impacted by a $14 million favourable adjustment to the carrying values of fibre and finished goods inventories. Inventories were at 16 days of supply at the end of September 2009, as compared to 22 days at the end of June 2009.

The Paper segment generated negative EBITDA of $11 million on sales of $93 million. This compares to nil EBITDA on sales of $109 million in the prior quarter. The $16 million decline in sales was driven by lower newsprint prices and volumes. The US $ reference price for newsprint decreased by US $121 per tonne while the reference price for coated bleached board declined by US $13 per short ton. Currency also negatively impacted pricing as the Canadian $ strengthened versus the US $. The combined effect was a decrease of $110 per tonne, decreasing EBITDA by $12 million. In view of very weak demand for newsprint, the Company undertook significant production curtailments. The Company incurred 2,600 tonnes of maintenance downtime and 55,000 tonnes of market related downtime in the most recent quarter. A further 12,500 tonnes of newsprint production were lost as a result of a work stoppage at the Pine Falls, Manitoba newsprint mill. The unionized employees were locked out in early September after the Company was not successful in negotiating a new labour contract. One of the three newsprint machines at the Kapuskasing newsprint mill was idle for the entire September 2009 quarter and the other two newsprint machines were idle for 17 days. The Pine Falls newsprint mill was idled for 45 days in July and August for market downtime and for 27 days in September subsequent to the lockout. In the prior quarter, the Company had incurred 58,400 tonnes of market related downtime.

Liquidity

At the end of September 2009, the Company had net cash of $105 million plus unused operating lines of $65 million, an increase of $20 million over the prior quarter. In response to the challenging conditions facing the forest products industry, the Company has developed a focused list of initiatives that should generate approximately $100 million of incremental liquidity. As of the date of this report, approximately $27 million has been achieved.

Pulp and Paper Green Transformation Program

On October 9, 2009, the Company was advised that it had qualified for $24 million of credits under the federal government's Pulp and Paper Green Transformation Program. The credits can be used to finance capital projects that generate environmental benefits, including investments in energy efficiency or the production of renewable energy from forest biomass. The Company has identified several high-returning projects that should qualify for this program and will be submitting them for qualification in the near future.

Outlook

While the September quarterly operating results were an improvement over June, they remained relatively poor. The strengthening Canadian $, the deterioration in the newsprint market and weak lumber markets all combined to negatively impact financial performance.

In response, the Company continued with selective production curtailments to manage and reduce inventories. This was a key factor in the Company's ability to improve its liquidity to $170 million. Looking ahead, lumber markets will remain challenging.

Pulp markets are improving with continued production curtailments and good demand from China providing the impetus. While newsprint prices decreased in the September quarter, price increases are now being implemented, albeit from very low levels. The segment will continue to be under pressure as producers curtail production in the wake of continuously declining demand.

The economy and general business conditions have slowly improved and the trend is expected to continue. However, the magnitude of the decline experienced earlier in the year will require several more quarters before we see a more robust economic recovery. Given this and the volatility of the US $ and product prices, the Company has placed a major emphasis on activities to maintain and enhance liquidity. A number of initiatives have been launched with the target to raise a further $73 million over the next 12 months. Certain additional initiatives are also under evaluation at this time.

SOURCE: Tembec




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