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Tembec's First Quarter Loss Narrows

Jan. 29, 2010 (Press Release) - Tembec yesterday reported financial results for its fiscal first quarter, ended December 26, 2009.

Consolidated sales for the three-month period were $412 million, down from $511 million in the comparable period of the prior year. The Company generated a net loss of $9 million or $0.09 per share in the December 2009 quarter compared to a net loss of $60 million or $0.60 per share in the December 2008 quarter. Earnings before non-recurring items, interest, income taxes, depreciation, amortization and other non-operating expenses (EBITDA) was $4 million for the three-month period ended December 26, 2009, as compared to EBITDA of $6 million a year ago and negative EBITDA of $9 million in the prior quarter.

BUSINESS SEGMENT RESULTS

The Forest Products segment generated negative EBITDA of $8 million on sales of $95 million. This compares to negative EBITDA of $5 million on sales of $105 million in the prior quarter. Sales decreased by $10 million due to lower prices and volumes for SPF lumber, as well as lower by-product revenues.

Demand for SPF lumber remained relatively weak with shipments equal to 42% of capacity, as compared to 43% in the prior quarter. US $ reference prices for random lumber increased by approximately US $11 per mbf while stud lumber increased by US $1 per mbf. Currency had a negative effect on pricing as the Canadian dollar averaged US $0.945, a 4% increase from US $0.910 in the prior quarter. The net price effect was a decrease in EBITDA of $2 million or $11 per mbf.

Mill level costs increased by $7 million as the previous quarter had benefitted from several non-recurring favourable cost items. During the December quarter, the Company recorded a favourable adjustment of $5 million on the carrying values of log and lumber inventories. In the prior quarter, the Company recorded a favourable adjustment of $2 million related to the carrying values of logs and lumber inventories. During the December quarter, the Company incurred $2 million of lumber export taxes, unchanged from the prior quarter. Lumber export taxes are payable based on the 2006 agreement between Canada and the United States. Applicable export tax rates may vary based upon selling prices.

During the December quarter, the Company incurred a tax of 15% on U.S. shipments, unchanged from the prior quarter.

The Pulp segment generated EBITDA of $17 million on sales of $256 million for the quarter ended December 2009 compared to EBITDA of $8 million on sales of $276 million in the prior quarter. Sales decreased by $20 million primarily as a result of lower volumes, partially offset by higher selling prices.

During the most recent quarter, shipments were equal to 69% of capacity, as compared to 80% in the prior quarter. The September quarter had experienced a significant reduction in inventories whereas the most recent quarter saw a small increase of three days.

The Company only operated two of its three high-yield pulp mills, unchanged from the prior quarter. In total, the Company incurred 55,600 tonnes of market related downtime and 15,900 tonnes of maintenance downtime in the December quarter. This compares to 55,700 tonnes of market related downtime and 20,900 tonnes of maintenance downtime in the prior quarter. US $ reference prices increased by US $85-$115 per tonne over the prior quarter, as pulp markets improved. Combined with the previously noted unfavourable currency impact, the net price effect was an increase of $50 per tonne, improving EBITDA by $17 million.

Current quarter margins were also positively impacted by a $6 million favourable adjustment to the carrying values of fibre and finished goods inventories. In the prior quarter, the Company had recorded a $14 million favourable adjustment to the carrying values of fibre and finished goods inventories.

The Company continues to focus on maintaining targeted inventory levels and to initiate production curtailments as required. Inventories were at 19 days of supply at the end of December 2009, as compared to 16 days at the end of September 2009.

The Paper segment generated negative EBITDA of $2 million on sales of $79 million. This compares to negative EBITDA of $11 million on sales of $93 million in the prior quarter. The $14 million decline in sales was driven by lower shipments.

During the most recent quarter, newsprint shipments were equal to 43% of capacity, as compared to 48% in the prior quarter. As a result of the very weak demand for newsprint, the Company undertook significant production curtailments. The Company incurred 22,800 tonnes of market related downtime and 3,800 tonnes of maintenance downtime in the most recent quarter. A further 45,500 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 quarter.

In the prior quarter, the Company incurred 55,000 tonnes of market related downtime and 2,600 tonnes of maintenance downtime. A further 12,500 tonnes of newsprint production was lost at Pine Falls subsequent to the lock-out.

The US $ reference price for newsprint increased by US $60 per tonne while the reference price for coated bleached board was unchanged. Combined with the previously noted unfavourable currency impact, pricing was unchanged and did not affect EBITDA. The $9 million improvement in EBITDA was driven by lower mill costs and reduced shipments.

LIQUIDITY

At the end of December 2009, the Company had net cash of $80 million plus unused operating lines of $49 million. 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, $29 million has been achieved.

OUTLOOK

While the December quarterly operating results were an improvement over September, they remained unsatisfactory. The strengthening Canadian dolar and weak newsprint and lumber markets combined to negatively impact financial performance. In response, the Company continued with selective production curtailments to manage and reduce inventories.

Looking ahead, lumber markets will remain challenging, but we expect some improvement over 2009. Pulp markets are improving with continued production curtailments and good demand from China providing the impetus. While newsprint prices increased in the December quarter, the fundamentals of this market remain poor. 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 in 2009 will require several more quarters before we see a more robust economic recovery. Given this and the weakness of the US dollar and certain 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 $71 million over the next 12 months. Certain additional initiatives are also under evaluation at this time.

SOURCE: Tembec




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