Tembec

Temiscaming, Quebec, Canada, 25 July 2006 -- Tembec's consolidated sales for the third quarter ended 24 June 2006 were CAD 862.3 million, down from CAD 937.7 million in the comparable period last year.

The company generated a net loss of CAD 6.6 million or CAD 0.08 per share compared to a net loss of CAD 142.5 million or CAD 1.70 per share in the corresponding quarter ended 25 June 2005, and a net loss of CAD 168.2 million or CAD 1.96 per share in the previous quarter. Earnings before unusual items, interest, income taxes, depreciation, amortization, and other nonoperating expenses (EBITDA) was CAD 21.2 million, unchanged from EBITDA of CAD 21.2 million a year ago and up from EBITDA of CAD 4.9 million in the prior quarter.

The June 2006 quarterly financial results include an after-tax gain of CAD 44.9 million or CAD 0.52 per share relating to the gain on translation of foreign debt. After adjusting for this item and certain specific items, the company would have generated a net loss of CAD 55.6 million or CAD 0.65 per share. This compares to a net loss of CAD 53.1 million or CAD 0.62 per share in the corresponding quarter ended 25 June 2005, and a net loss of CAD 109.5 million or CAD 1.28 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.

Business Segment Results

The Forest Products segment generated EBITDA of CAD 0.1 million on sales of CAD 271.1 million. This compares to EBITDA of CAD 13.7 million on sales of CAD 287.9 million in the prior quarter. The sales decrease of CAD 16.8 million was caused by lower selling prices for SPF lumber as well as lower volumes of third party log sales. The latter decrease is seasonal in nature as the March quarter represents a peak activity period for timber deliveries.

U.S. dollar reference prices for random lumber decreased by approximately USD 23 per mfbm while stud lumber decreased by USD 21 per mfbm. Currency was unfavourable as the Canadian dollar averaged USD 0.890, up 3% from USD 0.867 in the prior quarter. The net effect was a decrease in EBITDA of CAD 12.1 million or CAD 32 per mfbm. SPF lumber margins were negatively impacted by higher timber costs, primarily in the province of Ontario.

In the prior quarter, producers had benefited from government initiatives to reduce costs. The higher costs were offset by the seasonally higher profitability of the engineered wood business and lower lumber export duties. During the quarter, countervailing and antidumping duties totalled CAD 9.5 million, compared to CAD 10.7 million in the prior quarter. Since May 2002, the Company has incurred CAD 336.9 million of duties, which remain subject to the resolution of the softwood lumber dispute.

The Pulp segment generated EBITDA of CAD 14.1 million on sales of CAD 388.1 million for the quarter ended June 2006 compared to EBITDA of CAD 1.8 million on sales of CAD 355.7 million in the March 2006 quarter. The CAD 32.4 million increase in sales was driven by higher shipments and prices for paper pulps. While U.S. dollar reference prices increased over the prior quarter, currency partially offset the increase as the Canadian dollar averaged USD 0.890, up 3% from USD 0.867. The net price effect was an increase of CAD 20 per metric ton, increasing EBITDA by CAD 12.1 million. Total downtime in the June quarter was 11,200 metric tons, compared to 15,500 metric tons in the prior quarter.

The Paper segment generated EBITDA of CAD 5.1 million on sales of CAD 220.5 million. This compares to negative EBITDA of CAD 11.7 million on sales of CAD 202.3 million in the prior quarter. Sales increased by CAD 18.2 million primarily as a result of higher shipments. U.S. dollar reference prices for newsprint and coated bleached board improved by USD 14 per metric ton and USD 7 per short ton, respectively, while coated papers experienced a decline of USD 21 per short ton. The stronger Canadian dollar, which averaged USD 0.890, up 3% from USD 0.867 in the prior quarter, more than negated the improvement in prices. The net price effect was a decrease of CAD 20 per tonne, reducing EBITDA by CAD 5.0 million. Manufacturing costs were positively impacted by lower energy costs, which decreased by CAD 9.3 million over the prior quarter, as well as lower labour and maintenance costs which were higher in the prior quarter because of the annual maintenance shutdown at the St. Francisville papermill. Total downtime in the June quarter was 1200 metric tons, down from 12,400 metric tons in the prior quarter.

Other items

During the quarter, the Canadian and U.S. governments completed the negotiation of an agreement to govern the flow of Canadian softwood lumber into the United States. Before the agreement can come into effect, it requires approval by the Canadian parliament as well as acceptance by the Canadian lumber industry and the affected provinces. The current timetable calls for these approvals to be in place by 01 October 2006. The agreement provides for the return of a substantial portion of duties deposited since May 2002, including accrued interest thereon. Current estimates are that the company would receive a refund of approximately CAD 250 million and that a substantial portion of the refund would be remitted in the December 2006 quarter.

The company had previously set an objective of generating between CAD 100 million and CAD 150 million of funds from nonoperating initiatives in fiscal 2006. Following a further review of the ongoing initiatives, the company has increased the target to CAD 200 million. This target includes the sale of the OSB business that was successfully completed in late February for CAD 98 million.

Outlook

The improved operating results were driven by higher pricing in the pulp business and lower costs in the paper business. Going forward, the company does not anticipate any significant currency relief as the Canadian dollar continues to trade in the USD 0.88-0.90 range. The pulp market continues to improve, with a price increase implemented in July. However, lumber markets have softened over the last several months. The primary challenges faced by the industry are the strength of the Canadian dollar and higher chemical, energy, and wood costs, particularly in Eastern Canada. These issues are being addressed as part of the company's aggressive cost reduction program. The recent mill closures and the restructuring of the company's coated paper operations in St. Francisville, Louisiana, USA, are having a positive effect on financial results. The company continues to work for a timely resolution of the lumber dispute with the United States and a refund of monies deposited.

Tembec is a large, diversified and integrated forest products company. With operations principally located in North America and in France, the company employs approximately 10,000 people. Tembec's common shares are listed on the Toronto Stock Exchange under the symbol TBC. Additional information on Tembec is available at www.tembec.com