Tembec reports financial results for its second fiscal quarter ended March 25, 2017
Montreal, Quebec - Consolidated sales for the three-month period ended March 25, 2017, were $387 million, as compared to $380 million in the same quarter a year ago. The Company generated net earnings of $24 million or $0.24 per share in the March 2017 quarter compared to net earnings of $27 million or $0.27 per share in the March 2016 quarter. The prior year quarter included a non-cash gain of $27 million related to the translation of US dollar denominated debt. The March 2017 quarter includes a non-cash debt translation gain of $7 million. Operating earnings before depreciation, amortization and other items (adjusted EBITDA) was $54 million for the three-month period ended March 25, 2017, as compared to adjusted EBITDA of $36 million a year ago and adjusted EBITDA of $34 million in the prior quarter.
Business Segment Results
The Specialty Cellulose Pulp segment generated adjusted EBITDA of $28 million on sales of $120 million for the quarter ended March 25, 2017, compared to adjusted EBITDA of $10 million on sales of $103 million in the December 2016 quarter. The pulp sales increase of $15 million was due to higher shipments. Canadian dollar selling prices for specialty grades improved by $7 per tonne. While euro prices for specialty pulp at the Tartas mill increased by approximately 6%, this was largely offset by a weaker euro and a lower value sales mix at the Temiscaming pulp mill. Overall, Canadian dollar selling prices were relatively unchanged quarter-over-quarter. The $43 per tonne increase in the selling price of viscose and other grades was due to higher US dollar selling prices. Shipments were equal to 86% of capacity, compared to 73% in the December 2016 quarter. During the December 2016 quarter, the Tartas specialty cellulose pulp mill was idled for 11 days due to its major maintenance outage. These occur at 18 month intervals. The Temiscaming specialty cellulose pulp mill also incurred a two-day planned maintenance outage. There were no major maintenance outages in the March 2017 quarter. As a result, the two pulp mills produced 14,600 more tonnes in the March 2017 quarter. Manufacturing costs decreased by $17 million quarter-over-quarter, including $5 million for maintenance material and $10 million of fixed costs absorption associated with the aforementioned productivity increase. Chemical business adjusted EBITDA increased by $1 million.
The Forest Products segment generated adjusted EBITDA of $10 million on sales of $110 million for the quarter ended March 25, 2017, compared to adjusted EBITDA of $9 million on sales of $113 million in the prior quarter. SPF lumber sales decreased by $3 million due to lower shipments, partially offset by higher prices. During the March 2017 quarter, the random length lumber reference price increased by US $23 per mbf while the reference price for stud lumber increased by US $33 per mbf. Currency was not a significant factor as the Canadian dollar averaged US $0.755, a 0.5% increase from US $0.751 in the prior quarter. The combined effect was that Canadian dollar selling prices increased by $28 per mbf, increasing adjusted EBITDA by $5 million. Lumber shipments were equal to 87% of capacity, as compared to 95% in the prior quarter. The cash cost of SPF lumber increased by $3 million, primarily for purchased fibre.
The Paper Pulp segment generated adjusted EBITDA of $9 million on sales of $85 million in the March 2017 quarter, compared to adjusted EBITDA of $7 million on sales of $83 million in the December 2016 quarter. The $2 million increase in sales was due to higher selling prices and shipments. The benchmark price (delivered China) for bleached eucalyptus kraft (BEK) increased by US $77 per tonne. US dollar prices for high-yield pulp followed a similar but less pronounced trend, increasing by US $10 per tonne quarter-over-quarter. Overall, average selling prices for external sales in Canadian dollars increased by $11 per tonne, increasing adjusted EBITDA by $1 million. Pulp shipments were equal to 95% of capacity in both quarters. The two pulp mills produced 6,800 more tonnes than in the prior quarter and manufacturing costs were relatively unchanged.
The Paper segment generated adjusted EBITDA of $16 million on sales of $96 million for the quarter ended March 25, 2017, compared to adjusted EBITDA of $17 million on sales of $96 million in the December 2016 quarter. There were no significant changes to shipments or prices quarter-over-quarter. The US dollar reference price for coated bleached board was unchanged quarter-over-quarter. Overall, average selling prices for coated bleached board were down $22 per tonne decreasing adjusted EBITDA by $1 million. The coated bleached board shipment to capacity ratio was 106% compared to 101% in the prior quarter. Manufacturing costs increased by $2 million. The US dollar benchmark price for newsprint was unchanged quarter-over-quarter. The newsprint mill experienced a less favourable sales mix and US dollar prices declined by US $8 per tonne. Overall, average selling prices for newsprint decreased by $14 per tonne, reducing adjusted EBITDA by $1 million. The newsprint shipment to capacity ratio was 79% compared to 82% in the prior quarter. Costs increased by $2 million, primarily for electrical energy.
Lumber Duty Deposits
On April 24, 2017, the U.S. Department of Commerce (USDOC) announced its preliminary determination on countervailing duties (CVD) and imposed a preliminary duty rate of 19.88% on the Company’s shipments of lumber into the U.S. The Company as well as other Canadian lumber producers and the Federal and Provincial governments strongly disagree with the preliminary determination made by the USDOC. The Company intends to aggressively defend its position on this matter. More details are provided in the Subsequent Event section of the Company’s March 2017 quarterly filings.
Overall, the March 2017 quarterly results exceeded expectations as all four business segments generated operating earnings ahead of forecast. Currency was not a significant factor as the Canadian dollar averaged 0.5% higher versus the US dollar in the March 2017 quarter.
The $18 million increase in adjusted EBITDA for the Specialty Cellulose segment was largely expected. The combination of reduced maintenance, higher productivity and higher prices for certain specialty grades and viscose grades were all contributing factors that increased adjusted EBITDA margins beyond 25% for the quarter. While the Company anticipates continued strong results from this line of business, the June 2017 financial results will be impacted by the planned major maintenance outage at the Temiscaming mill in the month of May. Lumber markets continued to perform well and prices increased quarter-over-quarter. The recently announced CVD preliminary determination will impact the Company’s financial results and liquidity in future periods. A preliminary determination on antidumping duties (ADD) is expected in the June quarter. The Company anticipates that a portion of the CVD and ADD will be passed on to customers in the form of higher lumber prices. The implementation of CVD and ADD deposits will likely lead to more volatility as Canadian producers adapt to the changing circumstances. The Paper Pulp segment results continue to exceed expectations. Anticipated new BEK pulp capacity has been ramping up at a slower pace than initially expected. However, this new capacity will eventually occur, putting pressure on the hardwood pulp market. The Paper segment generated adjusted EBITDA of $16 million, which represents another solid quarter for the segment and it should continue to perform well. The coated bleached board market is well balanced leading to continued pricing stability. The newsprint market continues to experience declining demand and will require further capacity reduction to maintain a balanced market.
With trailing twelve-month adjusted EBITDA of $171 million, including $8 million of share-based compensation expense, the Company continued to demonstrate the positive impact on margins of the Temiscaming cogeneration project as well as other cost reduction and productivity initiatives. The Company will continue to focus on controllable items such as cost and working capital items with a goal of further improving operating margins. While the CVD and ADD deposits will impact future cash flow, the Company’s relatively high liquidity combined with anticipated improving margins have put it in a good position to continue to reduce its level of indebtedness and proceed with cost reducing capital expenditures.
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 approximately 3,000 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 March 25, 2017, can be obtained on Tembec’s website at www.tembec.com or on SEDAR at www.sedar.com.
The Company`s financial results have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). All financial references are stated in Canadian dollars, unless otherwise noted. All references to quarterly information relate to Tembec’s fiscal quarters. Adjusted EBITDA and certain other financial measures utilized in the press release are non-IFRS financial measures. As they have no standardized meaning prescribed by IFRS, they may not be comparable to similar measures presented by other companies. Non-IFRS financial measures are described in the Definitions section of the interim Management Discussion and Analysis (MD&A).
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 variations 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 the Company’s periodic filings with securities regulatory authorities, including under the “risk factors” section of the Company’s most recent Annual Information Form. 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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Michel J. Dumas
Executive Vice President, Finance and CFO
Tel: 819 627-4268
Vice President, Human Resources and Corporate Affairs
Tel.: 416 775-2819