Tembec reports financial results for its second quarter

April 26, 2012

By: Working Forest Staff

Consolidated sales for the three-month period ended March 24, 2012, were $407 million, as compared to $452 million in the comparable period of the prior year. The Company generated a net loss of $14 million or $0.14 per share in the March 2012 quarter compared to net earnings of $6 million or $0.06 per share in the March 2011 quarter. Operating earnings before depreciation, amortization and other items (adjusted EBITDA) was $2 million for the three-month period ended March 24, 2012, as compared to adjusted EBITDA of $34 million a year ago and adjusted EBITDA of $12 million in the prior quarter.

The Specialty Cellulose and Chemical Pulp segment generated adjusted EBITDA of $31 million on sales of $176 million for the quarter ended March 24, 2012, compared to adjusted EBITDA of $27 million on sales of $152 million in the prior quarter. Sales increased by $24 million primarily as a result of higher shipments.

The specialty cellulose market conditions remained favourable. A decrease in commodity viscose grade prices was offset by an increase in specialty grades. Currency was a negative factor for the Canadian mill as the Canadian dollar averaged US $0.998, a 2.1% increase from US $0.977 in the prior quarter. Currency also reduced reported sales of the French mill by $84 per tonne as the euro was 5% weaker versus the Canadian dollar. Overall, pricing was relatively unchanged quarter-over-quarter. Specialty cellulose shipments were equal to 89% of capacity as compared to 79% in the prior quarter. The relatively low level of shipments in the December 2011 quarter was due to unplanned equipment downtime at the two specialty cellulose facilities. Total cash costs were relatively unchanged quarter-over-quarter. Adjusted EBITDA increased by $2 million, primarily as a result of the previously noted increase in shipments.

The market conditions for Northern Bleached Softwood Kraft (NBSK) pulp weakened during the quarter. The benchmark price (delivered China) declined by US $26 per tonne. Combined with a stronger Canadian dollar and a lower sales mix factor, the total effect was a reduction in adjusted EBITDA of $6 million or $95 per tonne. NBSK shipments were equal to 94% of capacity as compared to 55% in the prior quarter. During the December 2011 quarter, the Company had taken 17 days of maintenance downtime in relation to the annual mill-wide shutdown of its NBSK mill, removing approximately 12,200 tonnes of production. The mill ran “full” in the March quarter and total cash costs were reduced by $7 million. Combined with higher shipments, adjusted EBITDA increased by $2 million.

The Paper segment generated adjusted EBITDA of $4 million on sales of $79 million for the quarter ended March 24, 2012, compared to adjusted EBITDA of $10 million on sales of $85 million in the prior quarter. Lower coated bleached board prices and newsprint shipments caused the $6 million reduction in sales. In terms of markets, coated bleached board weakened while newsprint remained stable despite continued weaker North American demand statistics. The US $ reference prices for coated bleached board declined by US $20 per short ton, while the reference price for newsprint was unchanged. The stronger Canadian dollar was a negative factor. The combined effect was a decrease in adjusted EBITDA of $3 million. Coated bleached board shipments were equal to 86% of capacity as compared to 87% in the prior quarter. The shipment to capacity percentage for newsprint was 85%, compared to 94% in the prior quarter. The weaker coated bleached board market conditions led to 1,200 tonnes of market related downtime in the most recent quarter. Mill level costs were relatively unchanged quarter-over-quarter.

The High-Yield Pulp segment generated negative adjusted EBITDA of $16 million on sales of $77 million for the quarter ended March 24, 2012, compared to negative adjusted EBITDA of $9 million on sales of $74 million in the prior quarter. Sales increased by $3 million, with higher shipments partially offset by lower selling prices. Market conditions for high-yield pulp remained weak in the most recent quarter. The US $ reference prices for bleached eucalyptus kraft (BEK) increased over the prior quarter by US $58 per tonne. However, the increase did not carry over to high-yield pulp as price compression had occurred in the prior quarter and the BEK increase only served to re-establish the normal differential in pricing. Currency was a negative factor as the Canadian dollar strengthened versus the US dollar. High-yield pulp prices declined by $40 per tonne, decreasing adjusted EBITDA by $6 million. High-yield pulp shipments were equal to 74% of capacity as compared to 65% in the prior quarter. Faced with continued weak market conditions, the Company reduced production to control inventory levels. During the most recent quarter, 9,300 tonnes of production were removed due to market downtime compared to 18,100 tonnes in the prior quarter. Total costs were relatively unchanged quarter-over-quarter. In the March 2012 quarter, the lower selling prices led to a $4 million charge relating to the reduction in carrying values of raw materials and finished goods inventories as they exceeded their estimated net realizable values. A $4 million charge was also recorded in the prior quarter. At the end of March 2012, the segment had accumulated $9 million of net realizable value reserves. Based on announced price increases, it is anticipated that the majority of these reserves will be reversed in the next two quarters.

The Forest Products segment generated negative adjusted EBITDA of $11 million on sales of $112 million for the quarter ended March 24, 2012, compared to negative adjusted EBITDA of $11 million on sales of $126 million in the prior quarter. The sale of the hardwood flooring operations in November 2011 reduced sales by $9 million. Lower shipments of SPF lumber were partially offset by higher lumber prices. Demand for SPF lumber remained relatively weak with shipments equal to 58% of capacity, as compared to 64% in the prior quarter. US $ reference prices for random lumber increased by US $31 per mbf on average while stud lumber increased by US $24 per mbf. Currency was a negative factor as the Canadian dollar increased versus the US dollar. The net price effect was an increase in adjusted EBITDA of $3 million or $13 per mbf. Costs increased by $3 million, primarily in the Eastern sawmills, which produced 11% less lumber. Adjusted EBITDA was unchanged quarter-over-quarter.

The March 2012 quarterly results were lower than anticipated. While the relatively weak paper pulp markets were expected to reduce adjusted EBITDA, a stronger Canadian dollar was not in the forecast. As a result of the combined impact, the Company absorbed a $15 million decrease in adjusted EBITDA related to the selling prices of paper pulp and paper products. The current quarter adjusted EBITDA also absorbed a charge of $4 million relating to a net realizable value adjustment on high-yield pulp inventories. Looking ahead, markets for specialty cellulose remain strong except for the viscose grades, where new supply is leading to lower prices. The Company’s strategy of focusing on specialty grades has proven to be the right one. Based on announced price increases for paper pulp, the March quarter will likely represent “the trough” for the NBSK and high-yield pulp mills in terms of pricing. While the anticipated seasonal increase in lumber prices did occur in the latter part of the recent quarter, it was not as pronounced as in prior years. This is not viewed as a completely negative development as the reduced price volatility may lead to more stable pricing in the next several quarters. Markets for coated bleached board and newsprint remain relatively stable and we do not anticipate much change in the near term. The Company has recently disclosed a relatively large scale capital expenditure program, with a strong emphasis on its two specialty cellulose pulp mills. The cornerstone of the program is a $190 million cogeneration plant to be constructed at the Temiscaming, Quebec, site that is scheduled to start-up in December 2013. The project will materially improve the mill’s cost structure and margins. During the quarter, the purchase power agreement with Hydro-Quebec was finalized and $75 million of project financing was put in place. At the end of the March quarter, the Company also completed the sale of its two B.C. sawmills for proceeds of $66 million. These monies, along with the US $50 million raised through the issuance of additional senior notes, constitute the bulk of the funding required for the Company’s capital expenditure program.

Tembec

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