Q&A with our CEO

Q: What has the company focused on over the last three years?

A: Reshaping Tembec for the better. The key has been exiting businesses where we were not competitive, or not in a position to be among the industry leaders, or lacked a significant differentiator. This meant closing unviable operations and divesting non-core assets. Our other priorities have been competitiveness, costs and our balance sheet.

Q: Will consolidation continue in the forest products industry?

A: Yes, because consolidation creates stronger and more focused companies. Here’s an example: We sold our hardwood flooring assets in late 2011 to a leader in that business. So they strengthened their core, while we left a business where Tembec was a small player and we’ll use the sale proceeds to strengthen our core. That’s a win-win.

Q: How competitive are your manufacturing operations?

A: Productivity is up and costs are down. Our sales per employee, a broad measure of productivity, increased by some 30% between 2006 and 2011. In that period we cut SG&A (selling, general and administrative) expenses in half. Our manufacturing facilities are now either low-cost operations or have that potential with additional investments.

Q: How is Tembec’s balance sheet?

A: Strong! We have excellent liquidity – money in the bank. Annual interest expense is now less than a quarter of what it was five years ago ($135 million in 2006, $30 million in 2011). And we continue to deleverage. We reduced net debt from $423 million in March 2010 to $203 million in September 2011 (Tembec’s fiscal year end).

Our strong balance sheet positions us to invest in our future, while retaining the values and guiding principles which define the way we do business. Some projects currently underway in green energy will reduce costs while improving productivity and environmental performance, so the benefits will be broad.

Q: What will Tembec look like in future?

A: We will be a forest products company like very few others. Tembec has planned over $500 million in capital expenditures in two areas: green energy, mainly cogenerated electricity; and improving our manufacturing operations in all businesses. All this will strengthen and stabilize earnings through the cycle, and make Tembec less dependent on commodities driven mainly by the state of the economy. And our eyes are open for opportunities, as our industry consolidates.

Q: Will you focus on any one business in your portfolio?

A: Specialty cellulose, which has high margins and is enjoying steady growth. Tembec is the number two player in that business, globally. We like businesses where we can be dominant and provide value our customers cannot easily find elsewhere. We concentrate mainly on specialty cellulose rather than lower-priced commodity dissolving pulp, but produce some commodity grades. Specialty cellulose has more stable demand than lumber, pulp or paper, so it provides more stable revenues and earnings.

A current $21 million project will see our Tartas, France, specialty cellulose facility produce an additional nine megawatts of cogenerated electricity, starting next year. And a long-term cogeneration contract will contribute to a steady revenue stream.

Q: What is the centerpiece of your investment plan?

A: Game-changing capital expenditures in cogenerated electricity. We plan a $190 million investment for 2012 and 2013 at our Temiscaming specialty cellulose operation. It is projected to improve costs and productivity, and generate 50 megawatts of electricity per year, producing steady long-term revenues through the economic cycle.

We already cogenerate electricity at five operations, so we know that business, and the Temsicaming project will use proven technology. Our debt service will remain manageable. So this is not a high risk project.

We are studying an additional $100 million investment at Temiscaming for 2014-2015. It would boost specialty cellulose capacity by 30,000 tonnes (a 10% increase overall), add ten megawatts of cogenerated electricity capacity per year, and reduce costs.

Q: How will you make your other businesses more competitive?

A: By investing cash flow in operations, to increase productivity and reduce costs. Our Business Improvement Plan includes dozens of smaller projects, totaling nearly $200 million over five years. The goal is to put each manufacturing facility in the first or second quartile of its industry for costs, to ensure competitiveness even when the economy troughs.

We can accelerate the plan if we generate more cash flow, or decelerate if the opposite becomes the case due to a slowing economy. In some cases, such as sawmills, we will add technology that is now common in that industry. We just weren’t in a position to make these investments until we reshaped our business and rebuilt our balance sheet.

Q: What are the roles of specialty cellulose and electricity in your portfolio?

A: Complementing the cyclical nature of our commodities – lumber, pulp and paper. Don’t forget that lumber, which has been down for a few years now, will provide big upside for Tembec once the US economy and housing start growing again.

The key is this: The steadier nature of specialty cellulose and electricity mean we will not be reduced to waiting for lumber or pulp to turn around, to generate attractive earnings.

Q: Does your sale of two BC sawmills telegraph a withdrawal from lumber?

A: Softwood lumber remains a core business for Tembec. We sold those sawmills because we liked the price and the proceeds will enable us to invest more in other parts of our business.

Tembec is one of the few companies with Forest Stewardship Council^® (FSC^®) certification for all our Canadian forestlands. And we believe our longstanding commitment to responsible forestry is a real differentiator in a commodity business like lumber.