Tembec's consolidated sales for the 4Q down by 13% to $675 million

Nov 22, 2007. /Lesprom Network/. Consolidated sales for the fourth quarter ended September 29, 2007 were $675 million, down from $781 million in the comparable period last year, Tembec reported. The company generated net earnings of $22 million or $0.25 per share compared to a net loss of $52 million or $0.62 per share in the corresponding quarter ended September 30, 2006, and a net loss of $164 million or $1.91 per share in the previous quarter. Earnings before unusual items, interest, income taxes, depreciation, amortization and other non-operating expenses (EBITDA) was $23 million, as compared to EBITDA of $26 million a year ago and up from EBITDA of $4 million in the prior quarter. The September 2007 quarterly financial results include an after-tax gain of $71 million or $0.83 per share relating to the gain on translation of foreign debt. After adjusting for this item and certain other items, the Company would have generated a net loss of $51 million or $0.60 per share. This compares to a net loss of $43 million or $0.51 per share in the corresponding quarter ended September 30, 2006 and a net loss of $76 million or $0.88 per share in the previous quarter. The impact of specific items on the Company's financial performance is discussed further in the Management Discussion and Analysis (MD&A) of its financial results. For the fiscal year ended September 29, 2007, sales were $2.8 billion as compared to $3.0 billion in the prior year. The Company generated a net loss of $49 million or $0.58 per share compared to a net loss of $292 million or $3.41 per share in fiscal 2006. EBITDA increased to $65 million from $42 million a year ago. The fiscal 2007 annual financial results include an after-tax gain of $124 million or $1.45 per share on the translation of its US $ denominated debt and an after-tax gain of $185 million or $2.16 per share related to the refund of lumber duties and interest thereon. After adjusting for these items and certain other items, the Company would have generated a net loss of $152 million or $1.79 per share. This compares to a net loss of $252 million or $2.94 per share in the prior year. Business Segment Results The Forest Products segment generated negative EBITDA of $13 million on sales of $203 million. This compares to negative EBITDA of $21 million on sales of $212 million in the prior quarter. The sales decrease of $9 million was caused primarily by lower shipments of SPF lumber. US $ reference prices for random lumber increased by approximately US $5 per mbf while stud lumber decreased by US $1 per mbf. Currency negatively impacted sales as the Canadian $ averaged US $ 0.957, a 5% increase from US $ 0.913 in the prior quarter. The currency impact was offset by higher average net sales values. Given the relatively soft lumber market conditions, the Company has made a decision to reduce the quantity of lower grade lumber produced in its sawmills. The net price effect was an increase in EBITDA of $1 million or $3 per mbf. Margins were positively impacted by lower operating costs. During the quarter, the Company incurred $5 million of lumber export taxes, unchanged from the prior quarter. 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 September 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 $51 million on sales of $369 million for the quarter ended September 2007 compared to EBITDA of $33 million on sales of $380 million in the June 2007 quarter. Lower effective Canadian $ selling prices combined with lower shipments generated the $11 million decline in sales. Reflecting the strength of the pulp market, inventories were at 19 days of supply at the end of September, down from 20 days at the end of the prior quarter. US $ reference prices increased for all grades of pulp. The increases in US $ reference prices were not enough to offset the negative impact of the stronger Canadian $. The net price effect was a decrease of $8 per tonne, decreasing EBITDA by $4 million. Margins were assisted by lower manufacturing costs. The summer months have lower energy costs and lower maintenance downtime. In the prior quarter, the Company had taken 13,700 tonnes of maintenance downtime compared to only 1,300 tonnes in the September 2007 quarter. While the local currency costs of the French pulp mills declined in Euros, the stronger Canadian $ resulted in a further reduction of $4 million in reported Canadian $ manufacturing costs. The Paper segment generated negative EBITDA of $10 million on sales of $116 million. This compares to negative EBITDA of $1 million on sales of $128 million in the prior quarter. The sales decrease of $12 million was due to lower effective prices. The US $ reference price for newsprint declined by US $25 per tonne while the reference price for coated bleached board increased by US $20 per short ton. The stronger Canadian $ also negatively impacted selling price. The net price effect was a decrease of $54 per tonne, decreasing EBITDA by $9 million. Manufacturing costs remained relatively unchanged from those of the prior quarter. The Company incurred 3,500 tonnes of market related downtime in the September 2007 quarter, up from 900 tonnes of maintenance downtime in the June 2007 quarter. In June 2007, the Company announced that the paper mill located in St. Francisville, Louisiana, would be indefinitely idled as of the end of July. The Company has not identified a feasible restructuring plan to resume operations at the facility. The assets, liabilities and financial results of the St. Francisville operation have been reclassified as discontinued operations. Other Liquidity at the end of September 2007 was $217 million, consisting of $14 million of cash and $203 million of unused operating lines of credit. The Company continues with initiatives to improve liquidity. The target for 2007 was to generate $100 million of additional liquidity through a combination of asset sales and increased working capital facilities. To date, a total of $103 million has been generated through these initiatives. The Company is exploring strategic alternatives to improve its capital structure and enhance liquidity. Strategic alternatives under consideration include non-core asset sales, cost reduction initiatives, refinancing or repayment of debt and issuance of new debt or equity. The review of strategic alternatives is being undertaken by Tembec's management and is being overseen by the Special Committee for Strategic Purposes and the Board of Directors. BMO Capital Markets is providing financial advice to Tembec. The Company remains focused on improving its operations in the context of a relatively difficult environment for forest products, while retaining a collaborative relationship with its customers, suppliers, and employees. Outlook Overall, the September quarterly operating results were in line with the Company's expectations. The rapid appreciation of the Canadian $ and the Euro versus the US $ negatively impacted all of the Company's business segments. Lumber and newsprint prices, when converted to Canadian $, are at trough levels. Looking ahead, pulp markets are expected to remain strong and price increases have already been announced for the December quarter. Newsprint and lumber will continue to be challenging as producers will need to adapt to relatively weak demand fundamentals. As for the Company, it will continue to focus on controllable items such as costs and operating efficiency, the key elements of its recovery plan. Management will also be expending considerable efforts to work with its financial advisors to develop and review potential strategic alternatives to address its current leveraged capital structure.