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Tembec
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Montreal, Quebec, Canada, 02 May 2008 -- Consolidated sales for the three-month period ended 29 March 2008, were CAD 593 million, down from CAD 714 million in the comparable period of the prior year. The company generated a net loss of CAD 42 million or CAD 0.49 per share in the months of January and February 2008 and a net loss of CAD 17 million or CAD 0.17 per share during the month of March 2008. This compares to a net loss of CAD 45 million or CAD 0.54 per share in the comparable three-month period of the prior year.

The financial results of the most recent quarter include two distinct components due to a financial recapitalization that occurred on 29 February 2008, triggering the requirement for the company to implement “fresh start” accounting as of that date. Earnings before unusual items, interest, income taxes, depreciation, amortization, and other nonoperating expenses (EBITDA) was negative-CAD 1 million for the three-month period ended 29 March 2008, as compared to EBITDA of CAD 24 million a year ago and EBITDA of negative-CAD 16 million in the prior quarter.

Business Segment Results

The Forest Products segment generated negative EBITDA of CAD 31 million on sales of CAD 153 million. This compares to negative EBITDA of CAD 22 million on sales of CAD 152 million in the prior quarter. Sales remained relatively unchanged, with seasonally higher by-product sales offsetting lower prices and volumes for lumber and engineered wood.

U.S. dollar (USD) reference prices for random lumber decreased by approximately USD 24 per mbf and stud lumber decreased by USD 22 per mbf. Currency provided a partial offset as the Canadian dollar (CAD) averaged USD 0.997, a 2% decrease from USD 1.018 in the prior quarter. The net price effect was a decrease in EBITDA of CAD 3 million or CAD 12 per mbf. Operating costs were higher as the colder winter months normally have a negative impact on sawmill operating efficiencies. During the quarter, the company incurred CAD 2 million of lumber export taxes, down from CAD 3 million in the prior quarter. Lower selling prices generated the lower export taxes. Lumber export taxes are payable based on the 2006 agreement between Canada and the United States. Applicable export tax rates vary based upon selling prices. During the March quarter, the company incurred a tax of 5% on eastern shipments and 15% on western shipments, unchanged from the prior quarter.

The Pulp segment generated EBITDA of CAD 42 million on sales of CAD 369 million for the quarter ended March 2008 compared to EBITDA of CAD 21 million on sales of CAD 311 million in the December 2007 quarter. Higher volumes and selling prices for all grades of pulp generated the $58 million increase in sales. U.S. dollar reference prices increased for all grades of pulp. Currency was also favorable, as the Canadian dollar averaged USD 0.997, a 2% decrease from USD 1.018 in the prior quarter. The total price effect was an increase of CAD 52 per metric ton, increasing EBITDA by CAD 25 million. Mill level costs decreased by CAD 7 million, primarily due to lower maintenance costs. In the prior quarter, the company incurred 26,900 metric tons of maintenance downtime, including 8300 metric tons related to equipment failures at the Tarascon paper pulp mill and the Temiscaming specialty pulp mill. This compares to only 200 metric tons of downtime taken in the most recent quarter. The reduction in costs would have been greater if not for increases in energy, chemicals, and transportation. As well, the stronger euro led to a CAD 7 million increase in the reported costs of the three French pulp mills. Inventories were at 25 days of supply at the end of March, up from only 24 days at the end of December. These are relatively low levels indicative of the strength of the current pulp market.

The Paper segment generated negative EBITDA of CAD 7 million on sales of CAD 98 million. This compares to negative EBITDA of CAD 12 million on sales of CAD 99 million in the prior quarter. The sales decrease of CAD 1 million was due to higher effective prices offset by lower shipments. The U.S. dollar reference price for newsprint increased by USD 46 per metric ton and the reference price for coated bleached board increased by USD 23 per short ton. Currency favorably affected sales as the Canadian dollar averaged USD 0.997, a 2% decrease from USD 1.018 in the prior quarter. The net price effect was an increase of CAD 53 per metric ton, increasing EBITDA by CAD 7 million. Manufacturing costs remained relatively unchanged from those of the prior quarter. The company incurred 17,100 metric tons of market related downtime and 500 metric tons of maintenance downtime in the March 2008 quarter compared to 17,400 metric tons of market related downtime and 3700 metric tons of maintenance downtime in the prior quarter.

Recapitalization

On 29 February 2008, the company completed a financial recapitalization plan with the following key financial elements:

* Conversion of USD 1.2 billion of Tembec’s Unsecured Senior Notes into new equity.

* Implementation of a new 4-year term loan of USD 300 million to provide additional liquidity.

* Reduction of Tembec’s annual interest expense by approximately CAD 67 million.

Tembec’s trade creditors, as well as its obligations to employees, including under its pension and benefit plans, were unaffected by the recapitalization.

Outlook

Overall, the March quarterly operating results were an improvement over the previous quarter, but remained well below acceptable levels. The extremely low U.S. dollar lumber selling prices experienced over the last several months offset most of the gains in pulp. As well, higher prices for fossil fuel are increasing the cost of transportation, chemicals, and direct energy purchases. Looking ahead, lumber markets will remain challenging as there are no clear signs of a U.S. housing recovery nor adequate production curtailments to balance the market. Pulp markets are expected to remain robust and price increases have already been announced for the June quarter. Newsprint prices increased in the March quarter and additional increases are anticipated during the June quarter. As for the company, it will continue to focus on controlable items such as costs and operating efficiency. With the recapitalization transaction successfully concluded, management can turn its full attention to managing the business. Despite the significant reduction in interest expense, the company' cash flow is not yet positive and this will be an area of considerable focus in the coming quarters.

Tembec is a large, diversified and integrated forest products company that is a global leader in sustainable forest management practices. With operations principally located in North America and in France, the company employs approximately 8000 people. Tembec’s common shares are listed on the Toronto Stock Exchange under the symbol TMB and warrants under TMB.WT. Additional information on Tembec is available at www.tembec.com.



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