Tembec improves over last year
Tembec has gone from a significant loss in Q2 2015 to a small profit in Q2 2016. Consolidated sales for the three-month period ended June 25, 2016, were $376 million, as compared to $365 million in the same quarter a year ago.
The company generated net earnings of $9 million or $0.09 per share in the June 2016 quarter compared to a net loss of $16 million or $0.16 per share in the June 2015 quarter. Operating earnings before depreciation, amortization and other items (adjusted EBITDA) was $26 million for the three-month period ended June 25, 2016, as compared to adjusted EBITDA of $2 million a year ago and adjusted EBITDA of $36 million in the prior quarter.
Business Segment Results
The Specialty Cellulose Pulp segment generated adjusted EBITDA of $10 million on sales of $111 million for the quarter ended June 25, 2016, compared to adjusted EBITDA of $17 million on sales of $120 million in the March 2016 quarter. The pulp sales decrease of $10 million was due to lower prices and lower shipments of viscose and other grades of pulp. Canadian dollar selling prices for specialty grades declined by $49 per tonne. The decrease was currency driven as US dollar and euro prices for specialty pulp were relatively unchanged quarter-over-quarter. The lower effective Canadian dollar prices reduced adjusted EBITDA by $2 million. The stronger Canadian dollar also led to a $90 per tonne decrease in the selling price of viscose and other grades. The lower viscose grade prices decreased adjusted EBITDA by $1 million. Shipments were equal to 85% of capacity, compared to 94% in the March 2016 quarter. During the June 2016 quarter, the Temiscaming specialty cellulose pulp mill was idled for six days as part of its annual major maintenance outage. Pulp mill costs increased by $6 million due to higher maintenance costs and lost production. Chemical business adjusted EBITDA was relatively unchanged.
The Forest Products segment generated adjusted EBITDA of $4 million on sales of $102 million for the quarter ended June 25, 2016, compared to adjusted EBITDA of $1 million on sales of $108 million in the prior quarter. SPF lumber sales increased by $3 million due to higher prices and shipments. Sales of logs declined by $9 million as there is normally less activity in the spring months. During the June 2016 quarter, the random length lumber reference price increased by US $39 per mbf while the reference price for stud lumber increased by US $43 per mbf. Currency was a negative factor as the Canadian dollar averaged US $0.776, a 6.7% increase from US $0.727 in the prior quarter. The net effect was that Canadian dollar selling prices increased by $12 per mbf, increasing adjusted EBITDA by $2 million.
Lumber shipments were equal to 82% of capacity versus 81% in the prior quarter. In response to relatively low stud lumber prices, the Company idled the Senneterre, Quebec, sawmill in early February 2016, removing approximately 14 million board feet of production in the March 2016 quarter and a further 20 million board feet in the June 2016 quarter. Sawmill manufacturing costs were relatively unchanged quarter-over-quarter.
The Paper Pulp segment generated adjusted EBITDA of $1 million on sales of $86 million for the quarter ended June 25, 2016, compared to adjusted EBITDA of $2 million on sales of $77 million in the March 2016 quarter. The $9 million increase in sales was due to higher shipments. The benchmark price (delivered China) for bleached eucalyptus kraft (BEK) decreased by US $21 per tonne. However, US dollar prices for high-yield pulp actually increased by US $14 per tonne, allowing it to close the significant discount gap that had occurred over the last several quarters. Currency was an unfavourable factor as the Canadian dollar strengthened versus the US dollar. Overall, average selling prices in Canadian dollars declined by $15 per tonne, reducing adjusted EBITDA by $3 million. Pulp shipments were equal to 107% of capacity as compared to 92% in the prior quarter. Mill level costs declined by $1 million.
The Paper segment generated adjusted EBITDA of $16 million on sales of $99 million for the quarter ended June 25, 2016, compared to adjusted EBITDA of $21 million on sales of $102 million in the March 2016 quarter. The decrease in sales was due to lower selling prices, partially offset by higher shipments of coated bleached board and newsprint. The US dollar reference price for coated bleached board declined by US $20 per short ton. Currency was a negative factor due to the stronger Canadian dollar. Overall, average selling prices for coated bleached board were down $133 per tonne decreasing adjusted EBITDA by $6 million. The coated bleached board shipment to capacity ratio was 105% compared to 99% in the prior quarter. Manufacturing costs declined by $3 million, mainly for purchased fibre and freight. The US dollar benchmark price for newsprint increased by US $12 per tonne. The previously noted appreciation in the relative value of the Canadian dollar unfavourably impacted price realizations, which declined by $30 per tonne, decreasing adjusted EBITDA by $2 million. The newsprint shipment to capacity ratio was 94% compared to 91% in the prior quarter. Manufacturing costs at the Kapuskasing newsprint mill increased by $1 million due to lower productivity.
Overall, the June 2016 quarterly results were as anticipated. A relatively heavy major maintenance schedule combined with an approximate 7% increase in the value of the Canadian dollar versus the US dollar led to the decline in operating results. The $7 million decline in Specialty Cellulose segment adjusted EBITDA was expected as the Temiscaming specialty pulp mill was idled for six days to carry out annual planned major maintenance. While US dollar and euro specialty cellulose prices were stable, exchange rates led to lower effective Canadian dollar selling prices. The September 2016 quarter results will be substantially better as both mills will see full operations.
Lumber prices improved in the second half of the June 2016 quarter and appear to have stabilized. Stud lumber prices have been significantly below random length lumber prices, negatively impacting the Company's results. The lumber market remains difficult to assess, but relatively balanced inventory levels combined with some improvement in demand should lead to quarter-over-quarter price increases.
The $1 million decrease in the Paper Pulp adjusted EBITDA was caused by currency. Hardwood paper pulp markets continue to be soft, as evidenced by the price decline in the benchmark BEK grade. This market will remain challenging. The Paper segment adjusted EBITDA decreased by $5 million, with a stronger Canadian dollar being once again the primary cause. US dollar prices for newsprint improved quarter-over-quarter while there was a slight weakening of coated bleached board US dollar prices. This segment should continue to perform well.
With trailing twelve-month adjusted EBITDA having reached $127 million, the company has been able to demonstrate the positive impact on margins generated by the Temiscaming Cogen project as well as year-over-year cost reductions in all business segments. The company will continue to focus on cost and working capital reductions with a goal of further improving operating results and reducing the company's overall level of indebtedness.
Tembec is a manufacturer of forest products – lumber, pulp, paper and specialty cellulose – and a global leader in sustainable forest management practices. Principal operations are in Canada and France. With annual sales of approximately $1.5 billion, Tembec has 3,250 employees and is listed on the TSX (TMB). The full quarterly report, including the interim Management Discussion and Analysis, the interim financial statements and the accompanying notes for the quarter ended June 25, 2016, can be obtained on Tembec's website at www.tembec.com or on SEDAR at www.sedar.com.
July 29, 2016 By Scott Jamieson
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