Tembec Posts Fourth Quarter Loss

Jan. 27, 2011 - Montreal-based Tembec reported consolidated sales for the three-month period ended December 25, 2010, were $422 million, as compared to $412 million in the comparable period of the prior year. The Company generated a net loss of $12 million or $0.12 per share in the December 2010 quarter compared to a net loss of $9 million or $0.09 per share in the December 2009 quarter. Operating earnings before depreciation, amortization and other specific or non-recurring items (EBITDA) was $11 million for the three-month period ended December 25, 2010, as compared to EBITDA of $4 million a year ago and EBITDA of $36 million in the prior quarter.

BUSINESS SEGMENT RESULTS

The Forest Products segment generated negative EBITDA of $11 million on sales of $113 million. This compares to negative EBITDA of $5 million on sales of $113 million in the prior quarter. Demand for SPF lumber remained relatively weak with shipments equal to 54% of capacity, as compared to 52% in the prior quarter. US $ reference prices for random lumber increased by approximately US $39 per mbf on average while stud lumber increased by US $13 per mbf. Currency partially offset the US $ price increase as the Canadian dollar averaged US $0.986, a 2.5% increase from US $0.962 in the prior quarter. As well, the product mix was not as favourable as in the prior quarter. The net price effect was an increase in EBITDA of $1 million or $5 per mbf. Mill level costs increased by $7 million. The prior quarter had benefited from favourable adjustments related to harvesting activities. The most recent quarter absorbed approximately $3 million of unfavourable operating variances.

During the December quarter, the Company incurred $3 million of lumber export taxes, up from $2 million in 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 both Western and Eastern lumber shipments.

The Dissolving and Chemical Pulp segment generated EBITDA of $19 million on sales of $148 million for the quarter ended December 25, 2010 compared to EBITDA of $30 million on sales of $166 million in the prior quarter. Sales decreased by $18 million primarily as a result of lower shipments of chemical pulp. During the most recent quarter, shipments were equal to 79% of capacity, as compared to 89% in the prior quarter.

During the December quarter, the Company incurred 11,700 tonnes of maintenance downtime. This was more than in the prior quarter, which included 5,900 tonnes of maintenance downtime. In the prior quarter, shipments of chemical pulp exceeded production by 5,100 tonnes, leading to unsustainably low levels of chemical pulp inventory. In the most recent quarter, production exceeded shipments by 6,500 tonnes and inventories increased by the same amount. US $ reference prices for chemical pulp decreased over the prior quarter. Currency was also unfavourable as the Canadian dollar strengthened versus the US dollar. The combined effect was a decrease of $57 per tonne, reducing EBITDA by $3 million.

Dissolving and specialty pulp prices increased by $16 per tonne, increasing EBITDA by $1 million. Mill level costs at the Tartas, France dissolving pulp mill increased by $10 million as a result of the planned annual maintenance shutdown combined with reduced productivity associated with an equipment failure that occurred after the shutdown. The equipment was repaired in late December and the mill subsequently returned to normal production levels. Inventories were at 20 days of supply at the end of December 2010, as compared to 19 days at the end of September 2010.

The High-Yield Pulp segment generated EBITDA of $7 million on sales of $107 million for the quarter ended December 25, 2010 compared to EBITDA of $13 million on sales of $104 million in the prior quarter. Sales increased by $3 million as higher shipments more than offset lower selling prices. During the most recent quarter, shipments were equal to 90% of capacity, as compared to 77% in the prior quarter.

On June 30, 2010, a fire occurred at the Chetwynd, BC high-yield pulp mill. The fire and related damages were primarily concentrated in the log storage and chip pile area. The mill was out of service for a period of approximately two weeks and subsequently resumed production at a reduced rate. It returned to full production on September 22, 2010. The total amount of lost production during the September quarter was approximately 17,400 tonnes. A further 5,300 tonnes of maintenance downtime was taken at the other two high-yield pulp mills in the prior quarter.

During the December quarter, the Company incurred only 1,200 tonnes of maintenance downtime. US $ reference prices decreased over the prior quarter. The stronger Canadian dollar was also a negative factor. The combined effect was a decrease of $82 per tonne, reducing EBITDA by $15 million. Cost of sales declined by $9 million. The insurance deductible of $5 million on the Chetwynd fire had increased costs by that amount in the prior quarter. The previously noted increased productivity generated the balance of the cost improvement. Inventories were at 27 days of supply at the end of December 2010, as compared to 26 days at the end of September 2010.

The Paper segment generated EBITDA of $4 million on sales of $87 million. This compares to EBITDA of $4 million on sales of $96 million in the prior quarter. Lower shipments of bleached board and newsprint led to the decline in sales. The decline in bleached board shipments was not caused by a decline in demand as markets were strong and shipments equalled 92% of capacity. The shipment to capacity ratio of +100% experienced in the prior two quarters was due to inventory reductions and was not sustainable.

During the most recent quarter, newsprint shipments were equal to 69% of capacity, as compared to 49% in the prior quarter. As a result of the continued weak demand for newsprint, the Company continued with production curtailments. The Company incurred 22,800 tonnes of market related downtime at the newsprint mill and 1,800 tonnes of maintenance downtime. In the prior quarter, the Company incurred 68,300 tonnes of market related downtime. This included 45,500 tonnes of market downtime at the Pine Falls, Manitoba newsprint mill. The facility was permanently closed at the end of September and is no longer counted as market downtime. The US $ reference price for coated bleached board was up by US $43 per short ton while the reference price for newsprint increased by US $5 per tonne. The stronger Canadian dollar more than offset the US dollar price increases. The net effect was a reduction of $1 million in EBITDA. Cost of sales was relatively unchanged from the prior quarter.

OUTLOOK

While a decline in the December 2010 quarterly results was anticipated, several unforeseen items negatively impacted financial performance. The relative strength of the Canadian dollar, which averaged nearly $0.99 versus the US dollar, reduced the EBITDA of all operating segments. In Forest Products, the higher prices for premium random lumber grades did not spill over into stud and lower quality grades. As well, lower seasonal productivity combined with timber quality issues at a few sawmills increased costs and led to unacceptable operating results. We anticipate better results in the coming quarters.

As planned, the Dissolving and Chemical Pulp segment absorbed significant maintenance costs during the quarter. It was a tactical decision to take the downtime ahead of what promises to be the best dissolving pulp pricing environment in recent memory. We will see a significant improvement in this segment's results in the March 2011 quarter.

The decline in High-Yield Pulp results was anticipated as hardwood paper pulp markets are seeing more challenging conditions than those of softwood markets. We anticipate prices will move sideways in the coming quarters.

The Paper segment results were in line with expectations. We anticipate gradual improvement in the segment's results over the next few quarters.

Finally, corporate expenses included a charge of $4 million for share-based compensation, as the value of the Company's common shares doubled in the quarter. The share appreciation is consistent with the Company's view that consolidated financial performance will improve significantly in the coming quarters.

Tembec is a large, diversified and integrated forest products company which stands as the global leader in sustainable forest management practices. The Company's principal operations are located in Canada and France.

SOURCE: Tembec Inc.