Tembec Reports Improved Fiscal Fourth Quarter 2013 Results

Nov. 21, 2013 - Tembec reported consolidated sales for the three-month period ended September 28, 2013, were $352 million, as compared to $443 million in the same quarter a year ago. The Company generated net earnings of $6 million or $0.06 per share in the September 2013 quarter compared to a net loss of $47 million or $0.47 per share in the September 2012 quarter. Operating earnings before depreciation, amortization and other items (adjusted EBITDA) was $25 million for the three-month period ended September 28, 2013, as compared to adjusted EBITDA of $23 million a year ago and adjusted EBITDA of $30 million in the prior quarter.

For the fiscal year ended September 28, 2013, consolidated sales were $1.5 billion, as compared to $1.7 billion in the prior year. The Company generated a net loss of $34 million or $0.34 per share compared to a net loss of $82 million or $0.82 per share in fiscal 2012. Adjusted EBITDA was $98 million compared to $64 million in the prior year.

BUSINESS SEGMENT RESULTS

The Specialty Cellulose Pulp segment generated adjusted EBITDA of $22 million on sales of $117 million for the quarter ended September 2013, compared to adjusted EBITDA of $19 million on sales of $120 million in the prior quarter. The sales decline of $3 million was due to lower shipments of pulp. Demand for specialty grades was flat while US and euro prices were relatively unchanged quarter-over-quarter. However, with the Canadian dollar weakening versus the US dollar and the euro, Canadian dollar equivalent pricing increased by $23 per tonne. Shipments were equal to 74% of capacity as compared to 79% in the prior quarter. Mill level manufacturing costs declined by $2 million.

The Forest Products segment generated adjusted EBITDA of $1 million on sales of $105 million for the quarter ended September 2013, compared to adjusted EBITDA of $7 million on sales of $110 million in the prior quarter. Sales decreased by $5 million due to lower lumber prices. The weaker market conditions that began in the month of June continued into the month of July. However, prices for random lumber rallied in August and September. Stud lumber prices did not rally and continue to sell at a relatively high discount compared to random lumber prices. Overall, US $ reference prices for random lumber decreased by US $19 per mbf while stud lumber decreased by US $64 per mbf. Currency was favourable as the Canadian dollar weakened versus the US dollar. The net effect decreased sales and adjusted EBITDA by $8 million or $41 per mbf. Lumber shipments were equal to 86% of capacity versus 83% in the prior quarter. Sawmill manufacturing costs were unchanged from the prior quarter.

The Paper Pulp segment generated negative adjusted EBITDA of $2 million on sales of $73 million for the quarter ended September 2013, compared to adjusted EBITDA of $3 million on sales of $106 million in the prior quarter. The $33 million decrease in sales was due to lower shipments of pulp. In May 2013, the Company completed the sale of its remaining NBSK mill located in Skookumchuck, British Columbia. During the prior quarter, the mill generated sales of $23 million and adjusted EBITDA of $3 million. Market conditions for paper pulp remained relatively weak although demand was stable. The benchmark price (delivered China ) for bleached eucalyptus kraft (BEK) decreased by US $45 per tonne. However, this decline did not affect high-yield pulp prices in the quarter. This grade, unlike BEK, had not experienced a price increase in the June 2013 quarter. Currency was a positive as the Canadian dollar was weaker. Overall, average prices increased by $8 per tonne, improving adjusted EBITDA by $1 million. Pulp shipments were equal to 88% of capacity as compared to 98% in the prior quarter. Manufacturing costs increased by $2 million, due primarily to under-absorption of fixed costs as the two pulp mills produced 7.8% fewer tonnes.

The Paper segment generated adjusted EBITDA of $8 million on sales of $81 million for the quarter ended September 2013, compared to adjusted EBITDA of $6 million on sales of $86 million in the prior quarter. Lower shipments led to the $5 million decrease in sales. In terms of markets, coated bleached board improved slightly. The newsprint market weakened due to continued lower North American demand combined with the restart of previously idled capacity. The US $ reference prices for coated bleached board increased by US $24 per short ton while the US $ reference price for newsprint declined by US $2 per tonne. The net effect was a small increase in average prices, increasing adjusted EBITDA by $1 million. Coated bleached board shipments were equal to 94% of capacity as compared to 102% in the prior quarter. The shipment to capacity percentage for newsprint was 81%, compared to 91% in the prior quarter. Manufacturing costs were relatively unchanged quarter-over-quarter.

OTHER ITEMS

In September 2013, the Company announced the BC Lands Sale Initiative with the objective of realizing up to $75 million in gross proceeds by December 2014. At the date of this report, the Company has reached agreements to sell various parcels of land for total gross proceeds of $23 million.

In November 2013, China issued its preliminary determination to antidumping duties to be applied to viscose grade pulp imported from Canada, the United States and Brazil. The Company was assigned a duty rate of 13% on viscose shipments to China. The antidumping duties do not apply to the specialty cellulose pulp mill located in Tartas, France. The specialty cellulose mill located in Temiscaming, Quebec, currently produces and sells approximately 40,000 tonnes per year of viscose grade pulp into the Chinese market. The balance of the mill's production is specialty grades, which are not subject to the antidumping duties.

OUTLOOK

Overall, the September 2013 quarterly results were in line with expectations. Weaker than anticipated profitability in lumber was offset by specialty cellulose and paper. While the relatively small decline in random length lumber prices was not unexpected, the 15% decrease in stud lumber prices was unforeseen. The latter grade is more closely tied to United States housing starts and there has been some softness in the data over the last several months. Pricing for random lumber has recently improved, but the significant gap with stud lumber remains. Pricing over the medium and longer term should increase, in step with the anticipated growth in United States new home construction.

Specialty Cellulose Pulp segment results continue to be negatively impacted by relatively low viscose grade prices. While pricing for specialty grades remained stable, demand has been softer than anticipated. We continue to assess the market with our customers and are adjusting our production plans accordingly. We anticipate that it will be one or two quarters before we see an increase in demand for specialty grades. Market conditions for viscose grade pulp remain weak. The latter market is currently under pressure as new capacity is exceeding demand growth. The recently announced Chinese antidumping duties on viscose grade pulp will exacerbate the situation. The Company currently has a position of 40,000 tonnes of viscose per year in the Chinese market. In anticipation of this announcement, the Company had been developing a plan to reduce the impact of the duties. The focus will now shift to implementing the plan.

The negative adjusted EBITDA generated by the Paper Pulp segment was expected given that the Company disposed of its profitable NBSK pulp mill in the prior quarter. The hardwood paper pulp market remains relatively soft and the impact of new capacity will cause it to remain challenging.

Paper segment results improved due to lower energy costs at the Kapuskasing newsprint mill.

The Company continues with its capital expenditure program, with a strong emphasis on its two specialty cellulose mills. The cornerstone of the program is the high-pressure boiler and turbine currently under construction at the Temiscaming, Quebec, site. The project will materially improve the mill's cost structure and margins. A total of $137 million has been spent on the Temiscaming specialty cellulose project to the end of the September 2013 quarter.

The Company has also made significant progress in dealing with its defined benefit pension plan obligations. As a result of relatively high contributions, good pension asset performance and an increase in discount rates, the Company's net pension deficit has decreased from $243 million to $71 million in the last 12 months. This will lead to a material decline in pension contributions in future periods.

The Company has recently launched its BC Lands Sale Initiative with the objective of realizing up to $75 million in gross proceeds by December 2014. This will be an area of focus in the next few quarters.

Tembec is a manufacturer of forest products — lumber, pulp, paper and specialty cellulose — and a global leader in sustainable forest management practices. Principal operations are in Canada and France . To learn more visit: www.tembec.com.

SOURCE: Tembec