Montreal, Quebec, Canada, 29 January 2009 -- Tembec's consolidated sales for the quarter ended 27 December 2008, were CAD 511 million, down from CAD 545 million in the comparable period of the prior year. The company generated a net loss of CAD 60 million or CAD 0.60 per share in the December quarter compared to a net loss of CAD 60 million or CAD 0.70 per share in the comparable three-month period of the prior year. Earnings before nonrecurring items, interest, income taxes, depreciation, amortization and other nonoperating expenses (EBITDA) was CAD 6 million for the three-month period ended 27 December 2008, as compared to negative EBITDA of CAD 16 million a year ago and EBITDA of CAD 29 million in the prior quarter.
The December 2008 quarterly financial results include an after-tax loss of CAD 50 million or CAD 0.50 per share relating to the loss on translation of foreign debt. After adjusting for this item and certain other items, the company would have generated a net loss of CAD 4 million or CAD 0.04 per share. This compares to a net loss of CAD 87 million or CAD 1.03 per share in the corresponding quarter of the prior year and a net loss of CAD 5 million or CAD 0.05 per share in the previous quarter.
Business Segment Results
The Forest Products segment generated negative EBITDA of CAD 16 million on sales of CAD 146 million. This compares with negative EBITDA of CAD 9 million on sales of CAD 167 million in the prior quarter. Sales decreased by CAD 21 million, due to lower prices and volumes for lumber. Engineered wood sales declined by CAD 9 million as a result of lower volumes. The Temlam engineered wood joint venture declared bankruptcy in early September and the company ceased consolidating its 50% share of sales and costs.
U.S. dollar reference prices for random lumber decreased by approximately USD 75 per mbf, and stud lumber decreased by USD 45 per mbf. Currency had a positive effect on pricing as the Canadian dollar averaged USD 0.827, a 14% decline from USD 0.959 in the prior quarter. The net price effect was a decrease in EBITDA of CAD 5 million or CAD 19 per mbf. Mill level costs increased by CAD 8 million. In the prior quarter, the company’s sawmills had benefited from a CAD 10 million favorable adjustment to the carrying value of log and lumber inventories as increasing prices led to higher projected net realizable values. The current quarter also benefited from a favorable adjustment of CAD 2 million. The nonconsolidation of the Temlam engineered wood operations improved EBITDA by CAD 2 million. During the December quarter, the company incurred CAD 3 million of lumber export taxes, unchanged from the prior quarter. This amount was offset by a favorable adjustment relating to export taxes previously paid during the October 2007 to March 2008 period. 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 December 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 4 million on sales of CAD 272 million for the quarter ended December 2008 compared with EBITDA of CAD 36 million on sales of CAD 361 million in the prior quarter. Sales declined by CAD 89 million as a result of lower shipments of all grades of pulp. While U.S. dollar reference prices declined, the current quarter pricing benefited from the weaker Canadian dollar. The net price effect was an increase of CAD 29 per metric ton, increasing EBITDA by CAD 9 million. Pulp demand continued to weaken and the company incurred 61,900 metric tons of market related downtime and 19,600 metric tons of maintenance downtime. This compares to 23,400 metric tons of market downtime and 300 metric tons of maintenance downtime in the prior quarter. The significant increase in downtime negatively affected mill level manufacturing costs, which increased by CAD 26 million. The balance of the decline in EBITDA relates primarily to sales volumes, which dropped by 28% over the prior quarter. The company continues to focus on maintaining targeted inventory levels and will initiate production curtailments as required. Inventories were at 42 days of supply at the end of December 2008, up from 30 days at the end of September 2008.
The Paper segment generated EBITDA of CAD 19 million on sales of CAD 126 million. This compares to EBITDA of CAD 7 million on sales of CAD 126 million in the prior quarter. Sales were unchanged, with higher prices offsetting lower shipments. The U.S. dollar reference price for newsprint increased by USD 37 per metric ton while the reference price for coated bleached board increased by USD 60 per short ton. Currency also had a positive effect on pricing. The combined price effect was an increase of CAD 154 per metric ton, increasing EBITDA by CAD 19 million. During the December quarter, manufacturing costs increased by CAD 5 million, primarily due to higher energy costs. The company incurred 27,000 metric tons of market related downtime and 8300 metric tons of maintenance downtime in the December 2008 quarter compared to 30,400 metric tons of market related downtime in the prior quarter. One of the three newsprint machines at the Kapuskasing newsprint mill was idle for the entire December 2008 quarter and the Pine Falls newsprint mill was idled for one week to reduce inventory levels.
At the end of December 2008, the company had net cash of CAD 58 million plus unused operating lines of CAD 193 million. The company had previously stated an objective of maintaining CAD 300 million of liquidity. The unplanned increase in pulp inventories was the primary cause of the liquidity decrease in the December quarter. The company is continuing with pulp production curtailments to control inventory levels. Cost reduction initiatives in SG&A are also being implemented.
Overall, the December quarterly operating results were in line with expectations as the sharp decline in the relative value of the Canadian dollar mitigated the effect of a rapidly deteriorating pulp market. The extremely low U.S. dollar lumber selling prices experienced over the last several quarters continues to depress earnings. Looking ahead, lumber markets will remain challenging, with no clear signs of a U.S. housing recovery. Pulp markets have weakened considerably and this downturn will likely last for several quarters. The company has responded by taking production curtailments, and more likely will be required in the future. Newsprint prices increased in the December quarter. However, U.S. newsprint demand continues to decline and producers will have to adjust to this reality. Overall, the problems facing the financial community, and the broader economy, have led to significant volatility and unprecedented decline in demand for most commodities. The positives for the company are a stronger U.S. dollar, a significant decrease in energy costs, and a good balance sheet and liquidity position. The risks are in low U.S. dollar pricing for forest products and declining demand as customers deal with the current economic and financial challenges. The company will continue to prioritize controlable items such as costs and operating efficiency.
Tembec is a large, diversified and integrated forest products company which stands as the global leader in sustainable forest management practices. With operations principally located in North America and in France, the company employs approximately 7000 people. 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 27 December 2008, can be obtained at www.tembec.com or on SEDAR at www.sedar.com.