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Tembec
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Montreal, Quebec, Canada, 18 November 2009 -- Consolidated sales for the three-month period ended September 26, 2009 were CAD 451 million, down from CAD 629 million in the comparable period of the prior year. The company generated a net loss of CAD 17 million or CAD 0.17 per share in the September 2009 quarter compared to a net loss of CAD 4 million or CAD 0.04 per share in the September 2008 quarter. Earnings before nonrecurring items, interest, income taxes, depreciation, amortization and other non-operating expenses (EBITDA) was negative CAD 9 million for the three-month period ended 26 September 2009, as compared to EBITDA of CAD 29 million a year ago and negative EBITDA of CAD 42 million in the prior quarter.

For the fiscal year ended 26 September 2009, sales were CAD 1.8 billion as compared to CAD 2.4 billion in the comparative 12-month period. The company generated a net loss of CAD 214 million or CAD 2.14 per share compared to a net loss of CAD 102 million or CAD 1.19 per share in the five-month period ended 29 February 2008, and a net loss of CAD 48 million or CAD 0.48 per share in the seven-month period ended 27 September 2008.

Business Segment Results

The Forest Products segment generated negative EBITDA of CAD 5 million on sales of CAD 105 million. This compares to negative EBITDA of CAD 18 million on sales of CAD 72 million in the prior quarter. Sales increased by CAD 33 million due to higher prices and volumes for lumber, and higher by-product volumes. U.S. dollar reference prices for random lumber increased by  approximately USD 22 per mbf while stud lumber increased by USD 37 per mbf. Currency had a negative effect on pricing as the Canadian dollar averaged USD 0.910, a 6% increase from USD 0.858 in the prior quarter. The net price effect was an increase in EBITDA of CAD 5 million or CAD 27 per mbf. Mill level costs decreased by CAD 11 million due to a combination of lower fibre costs and higher operating rates. Although lumber demand remained relatively weak, shipments were up 41% over the prior quarter. During the September quarter, the company recorded a favorable adjustment of CAD 2 million on the carrying values of log and lumber nventories. In the prior quarter, the company absorbed a charge of CAD 2 million related to a reduction of the carrying values of  logs and lumber inventories.   

The Pulp segment generated EBITDA of CAD 8 million on sales of CAD 276 million for the quarter ended September 2009 compared to negative EBITDA of CAD 22 million on sales of CAD 239 million in the prior quarter. Sales increased by CAD 37 million primarily as a result of higher volumes and selling prices. U.S. dollar reference prices increased by USD 80-90 per metric ton over the prior quarter, as pulp markets and demand improved. Currency had a negative effect on pricing as the Canadian dollar strengthened versus the U.S. dollar. The net price effect was an increase of CAD 13 per metric ton, improving EBITDA by CAD 5 million. Although pulp demand improved, the company only operated two of its three high-yield pulp mills, unchanged from the prior quarter. Overall, the company incurred 55,700 metric tons of market related downtime and 20,900 metric tons of maintenance downtime in the September 2009 quarter. This compares to 86,200 metric tons of market related downtime and 1300 metric tons of maintenance downtime in the prior quarter. Despite higher maintenance costs, overall mill costs declined by CAD 12 million due to lower fiber, chemical and energy costs. Current quarter margins were also positively effected by a CAD 14 million favorable adjustment to the carrying values of fiber and finished goods inventories. Inventories were at 16 days of supply at the end of September 2009, as compared to 22 days at the end of June 2009.

The Paper segment generated negative EBITDA of CAD 11 million on sales of CAD 93 million. This compares to nil EBITDA on sales of CAD 109 million in the prior quarter. The $16 million decline in sales was driven by lower newsprint prices and volumes. The U.S. dollar reference price for newsprint decreased by USD 121 per metric ton while the reference price for coated bleached board declined by USD 13 per short ton. Currency also negatively affected pricing as the Canadian dollar strengthened versus the U.S. dollar. The combined effect was a decrease of CAD 110 per metric ton, decreasing EBITDA by CAD 12 million. In view of very weak demand for newsprint, the company undertook significant production curtailments. The company incurred 2600 metric tons of maintenance downtime and 55,000 metric tons of market related downtime in the most recent quarter. A further 12,500 metric tons 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 labor contract. One of the three newsprint machines at the Kapuskasing newsprint mill was idle for the entire September 2009 quarter and the other two newsprint machines were idle for 17 days. The Pine Falls newsprint mill was idled for 45 days in July and August for market downtime and for 27 days in September subsequent to the lockout. In the prior quarter, the Company had incurred 58,400 metric tons of market related downtime.

Liquidity

At the end of September 2009, the company had net cash of CAD 105 million plus unused operating lines of CAD 65 million, an increase of CAD 20 million over the prior quarter. In response to the challenging conditions facing the forest products industry, the company has developed a focused list of initiatives that should generate approximately CAD 100 million of incremental liquidity. As of the date of this report, approximately CAD 27 million has been achieved.

Pulp and Paper Green Transformation Program

On 09 October 2009, the company was advised that it had qualified for CAD 24 million of credits under the federal government’s Pulp and Paper Green Transformation Program. The credits can be used to finance capital projects that generate environmental benefits, including investments in energy efficiency or the production of renewable energy from forest biomass. The company has identified several high-returning projects that should qualify for this program and will be submitting them for qualification in the near future.

Outlook

While the September quarterly operating results were an improvement over June, they remained relatively poor. The strengthening Canadian dollar, the deterioration in the newsprint market and weak lumber markets all combined to negatively affect financial performance. In response, the company continued with selective production curtailments to manage and reduce inventories. This was a key factor in the company’s ability to improve its liquidity to CAD 170 million. Looking ahead, lumber markets will remain challenging. Pulp markets are improving with continued production curtailments and good demand from China providing the impetus. Although newsprint prices decreased in the September quarter, price increases are now being implemented, albeit from very low levels. 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 earlier in the year will require several more quarters before we see a more robust economic recovery. Given this and the volatility of the U.S. dollar and 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 CAD 73 million over the next 12 months. Certain additional initiatives are also under evaluation at this time.

Tembec is a large, diversified and integrated forest products company and a global leader in sustainable forest management practices. The company’s principal operations are located in Canada and France. Tembec’s common shares are listed on the Toronto Stock Exchange under the symbol TMB and warrants under TMB.WT. The full quarterly report, including the interim Management Discussion and Analysis, the interim financial statements and the accompanying notes for the quarter ended 26 September 2009, can be obtained on Tembec’s Web site at www.tembec.com or from SEDAR at www.sedar.com

 


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