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Tembec 3Q Earnings Up Sharply on Pricing, Sales

July 29, 2010 - Tembec today reported consolidated sales for the three-month period ended June 26, 2010 (the company's fiscal 3rd quarter) were $545 million, up from $407 million in the comparable period of the prior year. The Company generated net earnings of $59 million or $0.59 per share in the June 2010 quarter compared to a net loss of $38 million or $0.38 per share in the June 2009 quarter. Operating earnings before depreciation, amortization and other specific or non-recurring items (EBITDA) was $60 million for the three-month period ended June 26, 2010, as compared to negative EBITDA of $42 million a year ago and EBITDA of $32 million in the prior quarter.

BUSINESS SEGMENT RESULTS

Forest Products

The Forest Products segment generated EBITDA of $6 million on sales of $126 million. This compares to negative EBITDA of $3 million on sales of $100 million in the prior quarter. Sales increased by $26 million due to higher prices and volumes for SPF lumber. Demand for SPF lumber remained relatively weak with shipments equal to 56% of capacity, up from 44% in the prior quarter.

US $ reference prices for random lumber increased by approximately US $5 per mbf while stud lumber increased by US $23 per mbf. Currency had a small negative effect on pricing as the Canadian dollar averaged US $0.973, a 1% increase from US $0.960 in the prior quarter. The net price effect was an increase in EBITDA of $5 million or $22 per mbf. Sawmill costs improved by $7 million versus the prior quarter.

During the June 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 recorded a favourable adjustment of $4 million related to the carrying values of logs and lumber inventories. During the June quarter, the Company incurred $3 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 June quarter, the Company incurred 15% on Western mill shipments in April, 10% in May and no taxes in June. The Eastern mill shipments were taxed at 15% in April, 13% in May and 10% in June.

Pulp

The Pulp segment generated EBITDA of $58 million on sales of $331 million for the quarter ended June 2010 compared to EBITDA of $41 million on sales of $311 million in the prior quarter. Sales increased by $20 million primarily as a result of higher selling prices. During the most recent quarter, shipments were equal to 96% of capacity, as compared to 80% in the prior quarter. On May 7, 2010, the Company completed the sale of two kraft pulp mills and related operations located in Southern France. During the June 2010 quarter, these operations contributed $43 million to sales, $10 million to EBITDA and $8 million to operating earnings. The two mills shipped 55,300 tonnes in the June quarter. Shipments in the most recent quarter also benefited from the re-start of the Chetwynd, BC, high-yield pulp mill in late January. The facility shipped 57,700 tonnes in the quarter as compared to 21,000 tonnes in the prior quarter.

During the June quarter, the Company incurred 1,600 tonnes of maintenance downtime. This was less than in the prior quarter which included 11,600 tonnes of market related downtime and 9,600 tonnes of maintenance downtime.

US $ reference prices increased by US $95-$125 per tonne over the prior quarter, as paper pulp markets continued to improve. Specialty pulp pricing was relatively unchanged from the prior quarter. Currency had a small negative effect on pricing as the Canadian dollar strengthened. The net price effect was an increase of $40 per tonne, improving EBITDA by $16 million.

Overall, costs were similar to those of the prior quarter. Inventories were at 21 days of supply at the end of June 2010, as compared to 22 days at the end of March 2010.

Paper

The Paper segment generated EBITDA of $1 million on sales of $96 million. This compares to negative EBITDA of $5 million on sales of $77 million in the prior quarter. The $19 million increase in sales was driven by higher shipments of bleached board. Strong demand resulted in shipments reaching 115% of capacity versus 83% in the prior quarter. During the most recent quarter, newsprint shipments were equal to 47% of capacity, as compared to 44% in the prior quarter. As a result of the continued weak demand for newsprint, the Company undertook significant production curtailments.

The Company incurred 68,300 tonnes of market related downtime in the most recent quarter. The Pine Falls, Manitoba, newsprint facility was idle for the entire quarter. One of the three newsprint machines at the Kapuskasing newsprint mill was also idle for the entire quarter. In the prior quarter, the Company incurred 68,300 tonnes of market related downtime and 600 tonnes of maintenance downtime.

The US $ reference price for newsprint increased by US $45 per tonne while the reference price for coated bleached board was up by US $40 per short ton. Currency negatively impacted pricing as the Canadian dollar strengthened. The combined impact on Canadian $ pricing was an increase of $1 million in EBITDA.

Newsprint manufacturing costs declined versus the prior quarter.

OUTLOOK

The June quarterly EBITDA of $60 million was a significant improvement over the prior quarter and well ahead of fiscal 2009 performance. All of the Company's business segments experienced improved results versus the prior quarter.

In lumber, the Company continued with selective production curtailments to manage and control inventory levels. Demand and pricing improved in April and May, but fell back in June. Continued pricing volatility is anticipated as relatively weak lumber demand is balanced against low supply chain inventories. An improvement in U.S. housing starts will be required to support more sustained lumber demand and prices in the medium and longer term.

Paper pulp markets, which had good market fundamentals, surged after the earthquake in Chile and its impact on global paper pulp supply. Now that supply disruptions are largely resolved, prices should decline in the coming quarters. However, good demand fundamentals should ensure that the prices will still be attractive for paper pulp producers. Specialty and dissolving pulp markets are also enjoying favourable market fundamentals. Strong prices are expected to continue in the upcoming quarters.

The results of the paper business should show better margins, driven by higher selling prices for newsprint and coated paperboard. The economy and general business conditions continue to improve. However, the magnitude of the decline experienced in 2009 will require several more quarters before we see a more robust economic recovery. The recent sale of the two French mills has significantly strengthened the Company's balance sheet, increasing liquidity to $270 million and reducing leverage below 30%.

SOURCE: Tembec




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