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Capital upgrades continue at Tembec

Consolidated sales for the three-month period ended September 29, 2012, were $443 million, as compared to $421 million in the comparable period of the prior year. Tembec generated a net loss of $47 million or $0.47 per share in the September 2012 quarter compared to a net loss of $17 million or $0.17 per share in the September 2011 quarter. The most recent quarter results include a non-cash asset impairment charge of $50 million relating to the recently idled Chetwynd, British Columbia, pulp mill. Operating earnings before depreciation, amortization and other items (adjusted EBITDA) was $23 million for the three-month period ended September 29, 2012, as compared to adjusted EBITDA of $19 million a year ago and adjusted EBITDA of $27 million in the prior quarter.

For the fiscal year ended September 29, 2012, consolidated sales were $1.7 billion, unchanged from the prior year. The Company generated a net loss of $82 million or $0.82 per share compared to a net loss of $5 million or $0.05 per share in fiscal 2011. Adjusted EBITDA was $64 million compared to $98 million in the prior year.

The Forest Products segment generated adjusted EBITDA of $8 million on sales of $108 million for the quarter ended September 29, 2012, compared to negative adjusted EBITDA of $2 million on sales of $86 million in the prior quarter. Sales increased by $22 million due primarily to higher shipments of lumber and sawmill by-products. Demand for SPF lumber improved with shipments equal to 70% of capacity, as compared to 59% in the prior quarter. US $ reference prices for random lumber increased by US $8 per mbf on average while stud lumber increased by US $7 per mbf. When combined with a higher sales mix factor, the net price effect was an increase in adjusted EBITDA of $3 million or $15 per mbf. Mill level manufacturing costs improved by $5 million. Costs are normally lower in the summer months and the sawmills also benefited from more continuous operations in the most recent quarter.

Overall, the September 2012 quarterly results were in line with expectations, with improving lumber profitability offsetting the negative impact of difficult paper pulp markets. The Forest Products segment had its best quarter in several years, both in terms of lumber demand and prices. The summer months are also seasonally more productive and lower cost as well. Looking ahead, the normal seasonal decline in prices is anticipated in the December quarter. While the recent housing statistics in the United States are encouraging, we continue to forecast a slow and gradual recovery in housing, with lumber demand and prices following a similar pattern.

The Specialty Cellulose and Chemical Pulp segment results were negatively impacted by currency as the Canadian dollar strengthened versus the US dollar and the euro. Market conditions for specialty cellulose were stable while those for NBSK pulp were very weak, with U.S.($) pricing reaching “trough” levels. The annual mill-wide maintenance outage at the Skookumchuck pulp mill, which is the Company’s most expensive outage, also impacted the segment’s quarterly results. We anticipate a stable market for specialty and viscose pulps in the coming quarters. There are price increases announced for NBSK and they should be implemented.

The adjusted EBITDA decline in the High-Yield Pulp segment was somewhat distorted by inventory adjustments. The prior quarter had benefited from an $8 million favourable adjustment to net realizable value inventory reserves as compared to a $3 million unfavourable adjustment in the September 2012 quarter. Absent the aforementioned adjustments, the decline in profitability was relatively modest and in line with expectations. Lower prices and the additional costs of idling the 240,000 tonnes per year Chetwynd, BC, mill led to the decline in High-Yield Pulp segment profitability. While price increases are being implemented, we expect market conditions for high-yield pulp to remain relatively weak. As well, future profitability will be enhanced as the Company will be operating its two lowest cost facilities going forward. The Paper segment had improved results due to good productivity and higher shipments. Stable paper markets are anticipated. However, profitability will be lower as the September 2012 quarter level of shipments is not sustainable.

Tembec continues with its capital expenditure program, with a strong emphasis on its two specialty cellulose mills. The cornerstone of the program is a $190 million high-pressure boiler and turbine to be installed at the Temiscaming, Quebec, site. The project will materially improve the mill’s cost structure and margins. A total of $59 million has been spent on the Temiscaming specialty cellulose project to the end of the September 2012 quarter. Tembec also said it has several other smaller capital projects, which are either in start-up mode or nearing completion. These projects will begin to positively impact adjusted EBITDA in the coming quarters.