Tembec Q4 Trails Market Estimates as Shipments Decline

By: E&P Staff

Press release from issuing company

Tembec reports its financial results for its fourth quarter and year ended September 25, 2010

Montreal, Quebec, November 17, 2010 Consolidated sales for the three-month period ended September 25, 2010 were $444 million, as compared to $451 million in the comparable period of the prior year. The Company generated net earnings of $2 million or $0.02 per share in the September 2010 quarter compared to a net loss of $17 million or $0.17 per share in the September 2009 quarter. Operating earnings before depreciation, amortization and other specific or non-recurring items (EBITDA) was $36 million for the three-month period ended September 25, 2010, as compared to negative EBITDA of $9 million a year ago and EBITDA of $60 million in the prior quarter.

For the fiscal year ended September 25, 2010, consolidated sales were $1.9 billion, up from $1.8 billion in the prior year. The Company generated net earnings of $52 million or $0.52 per share compared to a net loss of $214 million or $2.14 per share in fiscal 2009.

Business Segment Results

The Forest Products segment generated negative EBITDA of $5 million on sales of
$113 million in the September quarter. This compares to EBITDA of $6 million on sales of $126 million in the prior quarter. Sales decreased by $13 million due to lower prices and volumes for SPF lumber. Demand for SPF lumber remained relatively weak with shipments equal to 52% of capacity, as compared to 56% in the prior quarter. US $ reference prices for random lumber decreased by approximately US $40 per mbf while stud lumber decreased by US $77 per mbf. Currency had a small positive effect on pricing as the Canadian dollar averaged US $0.962, a 1% decrease from US $0.973 in the prior quarter. The net price effect was a decrease in EBITDA of $8 million or $38 per mbf. Cost of sales was relatively unchanged versus the prior quarter. During the September quarter, the Company incurred $2 million of lumber export taxes, down from $3 million in the prior quarter. Lumber export taxes are payable based on the 2006 agreement between Canada and the United States. Applicable export tax rates may vary based upon selling prices. During the September quarter, the Company incurred 10% on Western mill shipments in July and 15% in August and September. The Eastern mill shipments were taxed at 13% in July and 15% in August and September.

The Pulp segment generated EBITDA of $41 million on sales of $254 million for the quarter ended September 2010 compared to EBITDA of $58 million on sales of $331 million in the prior quarter. Sales decreased by $77 million as a result of lower shipments. During the most recent quarter, shipments were equal to 82% of capacity, as compared to 96% in the prior quarter. In the June quarter, the Company completed the sale of two kraft pulp mills and related operations located in Southern France. During the prior quarter, these operations contributed $43 million to sales, $10 million to EBITDA and $8 million to operating earnings. The two mills shipped 55,300 tonnes in the June quarter. On June 30, 2010, a fire occurred at the Chetwynd, BC high-yield pulp mill. The fire and related damages were primarily concentrated in the log storage and chip pile area. The mill was out of service for a period of approximately two weeks and subsequently resumed production at a reduced rate. It returned to full production on September 22, 2010. The total amount of lost production during the September quarter was approximately 17,400 tonnes. The Company maintains property and business interruption insurance on all of its facilities and the deductible absorbed by the Company for this event was $5 million, reducing EBITDA and operating earnings by this amount. During the September quarter, the Company also incurred 11,200 tonnes of maintenance downtime. This was more than in the prior quarter which included only 1,600 tonnes of maintenance downtime. US $ reference prices increased over the prior quarter. Specialty pulp pricing also improved from the prior quarter. Currency had a small positive effect on pricing as the Canadian dollar was weaker. The combined price effect was an increase of $31 per tonne, improving EBITDA by $9 million. Mill level costs increased by $7 million, primarily as a result of the previously noted maintenance downtime which occurred at four of the Company’s six pulp facilities. The sale of the French pulp mills and the absorption of the Chetwynd fire deductible accounted for the majority of decline in EBITDA. Inventories were at 23 days of supply at the end of September 2010, as compared to 21 days at the end of June 2010.

The Paper segment generated EBITDA of $4 million on sales of $96 million. This compares to EBITDA of $1 million on sales of $96 million in the prior quarter. Higher prices for newsprint and bleached board were offset by lower bleached board shipments. The decline in bleached board shipments was not caused by a decline in demand as markets were strong and shipments equalled 102% of capacity. The shipment to capacity ratio of 115% experienced in the prior quarter was due to inventory reductions and was not sustainable. During the most recent quarter, newsprint shipments were equal to 49% of capacity, as compared to 47% in the prior quarter. As a result of the continued weak demand for newsprint, the Company continued with production curtailments. The Company incurred 68,300 tonnes of market related downtime at the newsprint mills in the most recent quarter and 2,200 tonnes of maintenance downtime at the bleached board facility. The Pine Falls, Manitoba, newsprint facility was idle for the entire quarter. One of the three newsprint machines at the Kapuskasing newsprint mill was also idle for the entire quarter. In the prior quarter, the Company also incurred 68,300 tonnes of market related downtime. The US $ reference price for newsprint increased by US $37 per tonne while the reference price for coated bleached board was up by US $47 per short ton. Currency positively impacted pricing as the Canadian dollar was weaker. The combined impact on Canadian $ pricing was an increase of $6 million in EBITDA. The maintenance performed at the bleached board mill increased period manufacturing costs by $3 million.

Liquidity

At the end of September 2010, the Company had total cash of $74 million plus unused operating lines of $100 million. In August 2010, the Company completed a private offering of US $255 million of 11.25% senior secured notes maturing in December 2018. The notes were sold in a private offering to “qualified institutional buyers” as defined in Rule 144A under the U.S. Securities Act of 1933 and outside the U.S. in reliance on Regulation S under the Securities Act. The notes are senior secured obligations of the Company, secured by a first priority lien on the majority of the property and fixed assets of the Company. They are secured by a second priority lien on accounts receivable, inventories and certain intangibles. The net proceeds of the offering, together with cash on hand, were used to repay all outstanding indebtedness under the Company’s existing US $300 million term loan facility maturing in February 2012, including related fees, expenses and a 2% prepayment premium.

Outlook

While the September quarterly EBITDA of $36 million was a decline from the prior quarter, it did exceed the Company’s expectations. The sale of the two French pulp mills, the impact of the fire at the Chetwynd, BC pulp mill and the extensive maintenance downtime in the September quarter were all known items at the time the prior quarter results were published. As anticipated, lumber pricing remains somewhat volatile as relatively weak markets are balanced against low supply chain inventories. The emergence of China as a growing consumer of Western Canadian lumber is an encouraging development. A significant improvement in U.S. housing starts will be required to support more sustained lumber demand and prices in the medium and longer term. Paper pulp markets, which had good market fundamentals, surged after the earthquake in Chile and its impact on global paper pulp supply. Now that supply disruptions have been resolved, prices are declining, with hardwood pulp under more pressure than softwood pulp. However, good demand fundamentals should ensure that the prices will remain attractive for paper pulp producers. Specialty and dissolving pulp markets are enjoying very favourable market fundamentals. Strong prices are expected to continue in the upcoming quarters. The results of the paper business should show better margins, driven by higher selling prices for newsprint and coated paperboard. While the recent announcement of the permanent closure of the Pine Falls, Manitoba newsprint mill did negatively impact the September quarter financial results, it should lead to better performance for the paper segment in future periods. The successful refinancing and reduction of the Company’s term debt represented an important milestone and was indicative of investor support for the asset repositioning that has been ongoing over the last several years. The Company is well positioned to improve the quality and efficiency of its asset base and will be focused on this area in the upcoming fiscal year.

Tembec is a large, diversified and integrated forest products company which stands as the global leader in sustainable forest management practices. The Company’s principal operations are located in Canada and France. 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 September 25, 2010 can be obtained on Tembec’s website at www.tembec.com or on SEDAR at www.sedar.com.

This press release includes “forward-looking statements” within the meaning of securities laws. Such statements relate, without limitation, to the Company’s or management’s objectives, projections, estimates, expectations or predictions of the future and can be identified by words such as “may”, “will”, “could”, “anticipate”, “estimate”, “expect” and “project”, the negative or variation thereof, and expressions of similar nature. Forward looking statements are based on certain assumptions and analyses made by the Company in light of its experience, information available to it and its perception of future developments. Such statements are subject to a number of risks and uncertainties, including, but not limited to, changes in foreign exchange rates, product selling prices, raw material and operating costs and other factors identified in our periodic filings with securities regulatory authorities. Many of these risks are beyond the control of the Company and, therefore, may cause actual actions or results to materially differ from those expressed or implied herein. The forward-looking statements contained herein reflect the Company’s expectations as of the date hereof and are subject to change after such date. The Company disclaims any intention to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable securities legislation.

 

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