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Tembec
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Montreal, Quebec, Canada, 01 February 2007 -- Consolidated sales for the first quarter ended 30 December 2006 were CAD 724 million, down from CAD 789 million in the comparable period last year. The company generated net earnings of CAD 138 million or CAD 1.62 per share compared to a net loss of CAD 75 million or CAD 0.88 per share in the corresponding quarter ended 24 December 2005, and a net loss of CAD 54 million or CAD 0.64 per share in the previous quarter.

Earnings before unusual items, interest, income taxes, depreciation, amortization, and other non-operating expenses (EBITDA) were CAD 13 million, as compared to negative EBITDA of CAD 32 million a year ago and EBITDA of CAD 30 million in the prior quarter.

The December 2006 quarterly financial results include an after-tax gain of CAD 185 million or CAD 2.16 per share relating to the refund of lumber duties and related interest. After adjusting for this item and certain other items, the company would have generated net earnings of CAD 17 million or CAD 0.21 per share. This compares to a net loss of CAD 95 million or CAD 1.11 per share in the corresponding quarter ended 24 December 2005, and a net loss of CAD 47 million or CAD 0.55 per share in the previous quarter. The impact of specific items on the company's financial performance is discussed further in the Management Discussion and Analysis (MD&A) of its financial results.

Business Segment Results

The Forest Products segment generated negative EBITDA of CAD 15 million on sales of CAD 204 million. This compares to negative EBITDA of CAD 2 million on sales of CAD 254 million in the prior quarter. The sales decrease of CAD 50 million was caused primarily by lower volumes and selling prices for SPF lumber. U.S. dollar (USD) reference prices for random lumber decreased by approximately USD 31 per mfbm while stud lumber decreased by USD 13 per mfbm.

Currency provided a partial offset as the Canadian dollar averaged USD 0.877, a 2% decline from USD 0.892 in the prior quarter. The net effect was a decrease in EBITDA of CAD 10 million or CAD 33 per mfbm. Margins were also negatively affected by higher timber costs as they returned to more normal levels. The prior period had benefited from favorable timber costs. The higher manufacturing costs were partially offset by lower costs associated with shipment of lumber to the United States. During the quarter, the company incurred CAD 3 million of lumber export taxes as compared to CAD 8 million of lumber export duties expensed in the prior quarter. Lumber export taxes are payable based on the new agreement between Canada and the United States. See note 5 of the interim financial statements.

The Pulp segment generated EBITDA of CAD 20 million on sales of CAD 327 million for the quarter ended December 2006 compared to EBITDA of CAD 22 million on sales of CAD 394 million in the September 2006 quarter. The CAD 67 million decrease in sales was the result of lower shipments in all grades of pulp with higher selling prices providing a partial offset. The lower shipments were due to several factors. The company produced and sold less product because of increased maintenance downtime. In addition, the prior period was 14 weeks long versus the normal fiscal quarter of 13 weeks.

In the prior quarter, the Smooth Rock Falls pulp mill had operated for one month and had generated sales of 28,100 metric tons. The mill neither produced nor sold pulp in the December quarter. Finally, finished goods inventory increased. Paper pulp inventories had decreased to 18 days of supply at the end of September, a level which is not sustainable to provide adequate customer service. Paper pulp inventories increased to 27 days at the end of December, a level which the company considers adequate to meet customer requirements.

U.S. dollar reference prices increased for all grades of pulp. Prices were also assisted by currency as the Canadian dollar averaged 2% less versus the U.S. dollar as compared to the prior quarter. The net price effect was an increase of CAD 34 per metric ton, increasing EBITDA by CAD 15 million. Higher manufacturing costs offset the higher revenues. The company incurred higher labor and maintenance material costs associated with maintenance shutdowns at four of its pulp mills, including 10 days and 11 days respectively at the Tartas specialty pulp mill and the Tarascon paper pulp mill. The 3% appreciation of the Euro versus the Canadian dollar also negatively affected the reported costs of the three French pulp mills. The company incurred 21,400 metric tons of downtime in the December 2006 quarter as compared to 12,100 in the prior quarter.

The Paper segment generated EBITDA of CAD 6 million on sales of CAD 207 million. This compares to EBITDA of CAD 8 million on sales of CAD 235 million in the prior quarter. Sales decreased by CAD 28 million primarily as a result of lower shipments. The reduced shipments were primarily the result of the prior period being 14 weeks long versus the normal fiscal quarter of 13 weeks.

U.S. dollar reference prices for newsprint and coated papers declined by USD 9 per metric ton and USD 15 per short ton, respectively. The decline in reference prices was offset by currency, as the Canadian dollar averaged 2% less versus the U.S. dollar. The net price effect was an increase of CAD 17 per metric ton, increasing EBITDA by CAD 4 million.

Increased manufacturing costs, primarily at the St. Francisville paper mill, more than offset the increase in selling prices. The latter facility was required to take approximately one week of market related downtime in December. The depreciation of the Canadian currency versus the U.S. dollar also increased its reported costs. Total downtime in the December quarter was 10,900 metric tons compared to 1400 metric tons in the prior quarter.

Other items

During the quarter, the Canadian and U.S. governments implemented a new agreement to govern the flow of Canadian softwood lumber into the United States. The agreement came into effect on 12 October 2006. As part of the agreement, the company received USD 242 million on 30 October 2006. The amount received by the company corresponds to approximately 82% of the total amount of deposited lumber export duties, including interest, and represented substantially all of the monies the company will receive as reimbursement of previously deposited duties.

Outlook

Overall, the December quarterly operating results were in line with the company's expectations. Extremely low lumber selling prices combined with higher maintenance and downtime costs in the Pulp and the Paper segments negatively affected the reported margins. Better margins are anticipated in the coming quarters as market pulp prices remain strong and we see some improvement in lumber prices, albeit from a low level.

While some recent weakness in the Canadian dollar versus the U.S. dollar will be of some benefit, the company continues to manage the business on the assumption that the Canadian dollar will trade in the USD 0.87 to USD 0.89 range. The primary challenges faced by the industry are the strength of the Canadian dollar and higher chemical, energy, and wood costs, particularly in eastern Canada. These issues are being addressed as part of the company's recovery plan. While the recent softwood lumber agreement did not represent an optimal outcome for Canadian lumber manufacturers, it did replenish the company's liquidity. Efforts have now turned to optimization of operations given the new lumber export taxes and quotas.

Liquidity at the end of December 2006 was CAD 278 million. The receipt of USD 242 million relating to lumber duties and related interest in October substantially increased the company's overall liquidity levels. In addition, the company continues with other initiatives to improve liquidity. The target for fiscal 2007 is to generate CAD 50 million to CAD 100 million of additional liquidity through a combination of asset sales and increased working capital facilities.

Tembec is a large, diversified and integrated forest products company. With operations principally located in North America and in France, the company employs approximately 9000 people. Tembec's common shares are listed on the Toronto Stock Exchange under the symbol TBC. Additional information on Tembec is available on its website at www.tembec.com



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