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Management Side
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Tembec Reports Its Second Quarter Ended March 25, 2006
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Montreal, Quebec, Canada, 25 April 2006 – Consolidated sales for the second quarter ended 25 March 2006, were CAD 818.0 million, down from CAD 880.2 million in the comparable period last year.


The company generated a net loss of CAD 168.2 million or CAD 1.96 per share compared to a net loss of CAD 26.2 million or CAD 0.31per share in the corresponding quarter ended 26 March 2005, and a net loss of CAD 74.9 million or CAD 0.88 per share in the previous quarter. Earnings before unusual items, interest, income taxes, depreciation, amortization, and other nonoperating expenses (EBITDA) was CAD 4.9 million as compared to EBITDA of CAD 6.7 million a year ago and negative EBITDA of CAD 33.0 million in the prior quarter.

The March 2006 quarterly financial results include an after-tax loss of CAD 111.3 million or CAD 1.30 per share relating to impairment of long-lived assets at the Smooth Rock Falls, Ontario, pulpmill. After adjusting for this item and certain specific items, the company would have generated a net loss of CAD 109.5 million or CAD 1.28 per share. This compares to a net loss of CAD 66.7 million or CAD 0.78 per share in the corresponding quarter ended 26 March 2005, and a net loss of CAD 94.5 million or CAD 1.11 per share in the previous quarter. The impact of specific items on the company's financial results is discussed further in the Management Discussion and Analysis (MD&A) of its financial results.

Businesss Segment Results

The Forest Products segment generated EBITDA of CAD 13.7 million on sales of CAD 287.9 million. This compares to EBITDA of CAD 10.2 million on sales of CAD 275.4 million in the prior quarter. The sales increase of CAD 12.5 million was caused by higher volumes and selling prices for SPF lumber as well as higher volumes of third party log sales. The latter increase is seasonal in nature as the March quarter represents a peak activity period for timber deliveries. U.S. dollar reference prices for random lumber increased by approximately USD 17 per mfbm while stud lumber increased by USD 13 per mfbm. Currency was unfavorable, as the Canadian dollar averaged USD 0.867, up 2% from USD 0.852 in the prior quarter. The net effect was an increase in EBITDA of CAD 2.1 million or CAD 6 per mfbm.


SPF lumber margins were favorably affected by lower timber costs, primarily in the province of Ontario, where recent government initiatives have assisted all lumber producers. This benefit was offset by higher lumber export duties and the seasonably lower profitability of the engineered wood business. During the quarter, countervailing and antidumping duties totaled CAD 10.7 million, compared to CAD 6.4 million in the prior quarter. The charge for the prior quarter included a favorable adjustment of CAD 9.5 million relating to previously accrued antidumping duty charges in excess of actual cash deposits. Since May 2002, the company has incurred CAD 327.4 million of duties, which remain subject to the resolution of the softwood lumber dispute.

The Pulp segment generated EBITDA of CAD 1.8 million on sales of CAD 355.7 million for the quarter ended March 2006 compared to negative EBITDA of CAD 31.8 million on sales of CAD 313.4 million in the December 2005 quarter. The CAD 42.3 million increase in sales was driven by higher shipments in both paper and specialty pulps. While U.S. dollar reference prices increased over the prior quarter, currency offset the improvement as the Canadian dolalr increased 2% versus the U.S. dollar. The net price effect was a decrease of CAD 2 per metric ton, reducing EBITDA by CAD 1.2 million. EBITDA was favorably impacted by lower manufacturing costs, primarily driven by lower energy costs and reduced production curtailments. Total downtime in the March quarter was 15,500 metric tons, compared to 45,600 metric tons in the prior quarter.

The Paper segment generated negative EBITDA of CAD 11.7 million on sales of CAD 202.3 million. This compares to negative EBITDA of CAD 12.4 million on sales of CAD 216.3 million in the prior quarter. Sales decreased by CAD 14.0 million primarily as a result of lower shipments. The decline in specialty paper shipments relates to the permanent closure of the 80,000 metric tons per year uncoated bleached board machine at the St. Francisville, Louisiana, papermill, which occurred in December 2005. U.S. dollar reference prices for newsprint and coated bleached board improved by USD 17 per metric ton and USD 20 per short ton, respectively. Coated papers experienced a small decline of USD 5 per short ton. However, the stronger Canadian dollar more than negated the improvement in prices. The net price effect was a decrease of CAD 5 per metric ton, reducing EBITDA by CAD 1.2 million. Manufacturing costs were positively affected by lower energy costs, which decreased by CAD 7.2 million over the prior quarter, offsetting the additional costs associated with the annual maintenance shutdown at the St. Francisville papermill. Total downtime in the March quarter was 12,400 metric tons, up from 3500 metric tons in the prior quarter.

Other items

The company also announced today that its 200,000 metric tons per year northern bleached softwood kraft (NBSK) pulpmill in Smooth Rock Falls, Ontario, will be indefinitely idled, effective 31 July 2006. The closure will affect approximately 230 employees.

The company had previously set an objective of generating between CAD 100 and CAD 150 million of funds from nonoperating initiatives in fiscal 2006. Following a further review of the ongoing initiatives, the company has increased the targeted range to CAD 150-200 million. These amounts include the sale of the OSB business that was successfully completed in late February for CAD 98 million.

Outlook

The improved operating results were driven by lower energy costs and reduced production curtailments in our pulp business. Going forward, we do not anticipate any significant currency relief as the Canadian dollar continues to trade in the USD 0.85-0.88 range. The pulp market continues to improve, with a price increase implemented in April. 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 aggressive cost reduction program. The recent mill closures as well as the restructuring of our coated paper operations in St. Francisville, Louisiana, are expected to improve the company's future profitability. The company continues to work for a timely resolution of the lumber dispute with the United States and a refund of monies deposited.

Liquidity at the end of March 2006 was CAD 59.2 million. The relatively low level was anticipated given seasonal inventory increases and required interest payments. The company continues with its efforts to generate additional funds through several initiatives and will disclose events as they unfold.

Tembec is a leading integrated forest products company, with extensive operations in North America and France. With sales of approximately CAD 3.8 billion and some 10,000 employees, it operates 50 market pulp, paper, and wood product manufacturing units, and produces silvichemicals from by-products of its pulping process and specialty chemicals. Tembec markets its products worldwide and has sales offices in Canada, the United States, the United Kingdom, Switzerland, China, Korea, Japan, and Chile. The company also manages 40 million acres of forest land in accordance with sustainable development principles and has committed to obtaining Forest Stewardship Council (FSC) certification for all forests under its care. Tembec's common shares are listed on the Toronto Stock Exchange under the symbol TBC. Additional information is available at www.tembec.com




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