Tembec reports financial results for its first quarter ended December 29, 2007



    MONTREAL, Feb. 12 /CNW Telbec/ - Consolidated sales for the first quarter
ended December 29, 2007 were $545 million, down from $649 million in the
comparable period last year. The Company generated a net loss of $60 million
or $0.70 per share compared to net earnings of $138 million or $1.62 per share
in the corresponding quarter ended December 30, 2006, and net earnings of
$22 million or $0.25 per share in the previous quarter. Earnings before
unusual items, interest, income taxes, depreciation, amortization and other
non-operating expenses (EBITDA) was negative $16 million, as compared to
EBITDA of $14 million a year ago and EBITDA of $23 million in the prior
quarter.
    The December 2006 quarterly financial results included an after-tax gain
of $185 million or $2.16 per share relating to the recovery of lumber duties.
After adjusting for this item and certain other items, the Company would have
generated net earnings of $23 million or $0.28 per share. This compares to a
net loss of $87 million or $1.03 per share in the quarter ended December 29,
2007 and a net loss of $51 million or $0.60 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 negative EBITDA of $22 million on
sales of $152 million. This compares to negative EBITDA of $13 million on
sales of $203 million in the prior quarter. The sales decrease of $51 million
was caused primarily by lower shipments of SPF lumber. US $ reference prices
for random lumber decreased by approximately US $32 per mbf while stud lumber
decreased by US $42 per mbf. Currency negatively impacted sales as the
Canadian $ averaged US $ 1.018, a 6% increase from US $ 0.957 in the prior
quarter. The currency impact was partially 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 a decrease in EBITDA of $10 million or
$40 per mbf. Operating costs were relatively unchanged. During the quarter,
the Company incurred $3 million of lumber export taxes, down from $5 million
in the prior quarter. The reduction was driven by lower volumes and prices.
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 December 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 $21 million on sales of $311 million
for the quarter ended December 2007 compared to EBITDA of $51 million on sales
of $369 million in the September 2007 quarter. Lower effective Canadian $
selling prices combined with lower shipments generated the $58 million decline
in sales. Effective this quarter, the proportionate (50%) results of the AV
Cell specialty pulp mill are no longer included in the Pulp segment results.
In the prior quarter, the Company's results included 16,600 tonnes of
shipments and $15 million of sales from this facility. 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 $7 per tonne, decreasing EBITDA by $3 million.
Mill costs increased by $21 million, due primarily to increased downtime. In
the December 2007 quarter, the Company incurred 26,900 tonnes of maintenance
downtime, including 8,300 tonnes related to equipment failures at the Tarascon
paper pulp mill and the Temiscaming specialty pulp mill. This compares to only
1,300 tonnes of planned maintenance downtime in the prior quarter. Higher
energy costs, particularly in our European operations, increased cost by a
further $5 million. Inventories were at 24 days of supply at the end of
December, up from only 19 days at the end of September. These are relatively
low levels indicative of the strength of the current pulp market.
    The Paper segment generated negative EBITDA of $12 million on sales of
$99 million. This compares to negative EBITDA of $10 million on sales of
$116 million in the prior quarter. The sales decrease of $17 million was due
to lower effective prices and shipments. Newsprints shipments declined by
15,000 tonnes as the Company indefinitely idled one of the three paper
machines at the Kapuskasing newsprint mill. The US $ reference price for
newsprint increased by US $3 per tonne while the reference price for coated
bleached board increased by US $10 per short ton. Currency negatively impacted
sales as the Canadian $ averaged 6% higher versus the US $. The net price
effect was a decrease of $28 per tonne, decreasing EBITDA by $4 million.
Manufacturing costs remained relatively unchanged from those of the prior
quarter. The Company incurred 17,400 tonnes of market related downtime and
3,700 tonnes of maintenance downtime in the December 2007 quarter compared to
3,500 tonnes of market related downtime in the prior quarter.

    Recapitalization Plan and Liquidity
    -----------------------------------

    On December 19, 2007, the Company announced a proposed recapitalization
plan with the following key financial elements:

    
    - Conversion of US $1.2 billion of Tembec's Unsecured Senior Notes into
      new equity.
    - Implementation of a new 4-year term loan of US $300 million to provide
      additional liquidity.
    - Reduction of Tembec's annual interest expense by approximately
      $67 million.

    Tembec's trade creditors, as well as its obligations to employees,
including under its pension and benefit plans, are unaffected by the
recapitalization and will continue to be paid or satisfied in the ordinary
course of business.
    Noteholders holding, in aggregate approximately US $795 million of the
outstanding notes (representing approximately 66% of the outstanding notes)
have executed support agreements and have agreed to vote in favour of and
support the recapitalization. More detailed information about the
recapitalization can be found in Tembec's management proxy circular dated
January 25, 2008 which can be found on SEDAR (www.sedar.com), EDGAR
(www.sec.gov/edgar.shtml) and the Company's website (www.tembec.com).
    Liquidity at the end of December 2007 was $128 million, consisting of
$22 million of cash and $106 million of unused operating lines of credit.
Immediately following the end of the December quarter, on December 30, 2007,
the Company made a US $15 million interest payment on the US $350 million
Unsecured Senior Notes due June 2009. Under the terms of the recapitalization,
accrued interest to December 31, 2007 totalling US $26 million on the
US $500 million Unsecured Senior Notes due February 2011 and the US $350
million Unsecured Senior Notes due March 2012 will be paid on the date the
recapitalization is implemented. The Company currently anticipates that the
recapitalization will be implemented on or about February 29, 2008.

    Outlook
    -------

    Overall, the December quarter operating results were below the Company's
expectations. While the Company had anticipated a stronger Canadian $ versus
the US $, it did peak at unexpectedly high levels. As well, the Company
experienced higher than expected maintenance costs in the Pulp segment.
Looking ahead, pulp markets should remain strong and price increases have
already been announced for the March quarter. Newsprint prices increased in
the latter part of the December quarter and additional increases are
anticipated during the March quarter. 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 advisors to complete
and implement the proposed recapitalization plan.
    Tembec is a large, diversified and integrated forest products company.
With operations principally located in North America and in France, the
Company employs approximately 8,000 people. Tembec's common shares are listed
on the Toronto Stock Exchange under the symbol TBC. Additional information on
Tembec is available on its website at www.tembec.com

    This press release includes "forward-looking statements" within the
meaning of securities laws. Such statements relate to the Company's or
management's objectives, projections, estimates, expectations or predictions
of the future and can be identified by words such as "anticipate", "estimate",
"expect", " will" and "project" or variations of such words. These statements
are based on certain assumptions and analyses made by the Company in light of
its experience 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 our periodic filings with
securities regulatory authorities in Canada and the United States. 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 Company disclaims any intention or obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.



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                                 TEMBEC INC.
                         CONSOLIDATED BALANCE SHEETS
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    (unaudited) (in millions of dollars)

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                                                         Dec. 29,   Sept. 29,
                                                            2007        2007
                                                                    (Audited)
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    Assets
    Current Assets:
      Cash and cash equivalents                          $    22     $    14
      Accounts receivable                                    326         347
      Inventories                                            453         436
      Prepaid expenses                                        11          15
      Current assets from discontinued operations
       (note 3)                                                6          18
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                                                             818         830

    Investments                                               33          28
    Fixed assets                                           1,537       1,584
    Other assets                                             153         146
    Future income taxes                                       49          67
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                                                         $ 2,590     $ 2,655
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    Liabilities and Shareholders' Equity
    Current Liabilities:
      Bank indebtedness                                  $     2     $     -
      Operating bank loans                                   159          89
      Accounts payable and accrued charges                   308         363
      Interest payable                                        41          17
      Current portion of long-term debt (note 4)              23          26
      Current liabilities related to discontinued
       operations (note 3)                                     3           6
    -------------------------------------------------------------------------
                                                             536         501

    Long-term debt (note 4)                                1,294       1,314
    Other long-term liabilities and credits                  124         125
    Future income taxes                                       79          93
    Minority interest                                          -           5
    Redeemable preferred shares                               26          26
    Non-current liabilities related to discontinued
     operations (note 3)                                      25          25

    Shareholders' equity:
      Share capital (note 5)                                 840         840
      Accumulated other comprehensive loss                    (3)         (3)
      Deficit                                               (331)       (271)
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                                                             506         566
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                                                         $ 2,590     $ 2,655
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                                 TEMBEC INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
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    Quarters ended December 29, 2007 and December 30, 2006
    (unaudited) (in millions of dollars, unless otherwise noted)

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                                                                Quarters
                                                            2007        2006
    -------------------------------------------------------------------------
    Sales                                                $   545     $   649
    Freight and sales deductions                              63          75
    Lumber duties and export taxes (note 6)                    3           3
    Cost of sales                                            469         526
    Selling, general and administrative                       26          31
    Depreciation and amortization                             42          45
    Recovery of lumber duties (note 7)                         -        (238)
    Restructuring and asset impairment charges (note 7)        1          29
    Gain on land sales and other (note 7)                    (20)         (8)
    -------------------------------------------------------------------------
    Operating earnings (loss) from continuing
     operations                                              (39)        186

    Interest, foreign exchange and other (note 8)             31         (14)
    Exchange loss (gain) on long-term debt                   (16)         61
    -------------------------------------------------------------------------
    Earnings (loss) from continuing operations before
     income taxes and share of earnings of related
     companies                                               (54)        139

    Income tax expense (recovery) (note 9)                     3          (4)
    Share in earnings of related companies                     -          (1)
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    Net earnings (loss) from continuing operations           (57)        144
    Loss from discontinued operations (note 3)                (3)         (6)
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    Net earnings (loss)                                  $   (60)    $   138
    -------------------------------------------------------------------------
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    Basic and diluted earnings (loss) per share from
     continuing operations (note 5)                      $ (0.67)    $  1.69
    Basic and diluted loss per share from
     discontinued operations (note 5)                    $ (0.03)    $ (0.07)
    Basic and diluted earnings (loss) per share
     (note 5)                                            $ (0.70)    $  1.62
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                                 TEMBEC INC.
           CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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    Quarters December 29, 2007 and December 30, 2006
    (unaudited) (in millions of dollars, unless otherwise noted)

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                                                                Quarters
                                                            2007        2006
    Net earnings (loss)                                  $   (60)    $   138
    Other comprehensive income (loss):
    Exchange translation of foreign subsidiaries               -           -
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    Comprehensive income (loss)                          $   (60)    $   138
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                     CONSOLIDATED STATEMENTS OF DEFICIT
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    Quarters ended December 29, 2007 and December 30, 2006
    (unaudited) (in millions of dollars, unless otherwise noted)

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                                                                Quarters
                                                            2007        2006
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    Deficit, beginning of period                         $  (271)    $  (249)
    Adjustment resulting from a change in accounting
     policies (note 2)                                         -     $    27
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    Restated deficit, beginning of period                $  (271)    $  (222)
    Net earnings (loss)                                      (60)        138
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    Deficit, end of period                               $  (331)    $   (84)
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                                 TEMBEC INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
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    Quarters ended December 29, 2007 and December 30, 2006
    (unaudited) (in millions of dollars)

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                                                                Quarters
                                                            2007        2006
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    Cash flows from operating activities:
      Net earnings (loss)                                $   (60)    $   138
      Adjustments for:
        Loss from discontinued operations (note 3)             3           6
        Depreciation and amortization                         42          45
        Unrealized foreign exchange and others (note 8)        -           2
        Exchange loss (gain) on long-term debt               (16)         61
        Future income taxes (recovery) (note 9)                3         (42)
        Utilization of investment tax credits                 (4)         33
        Restructuring and asset impairment charges
         (note 7)                                              1          17
        Gain on land sales and other (note 7)                (20)         (8)
        Differences between cash contributions and
         pension expense                                      (4)         (1)
        Other                                                  2           -
    -------------------------------------------------------------------------
                                                             (53)        251
    Changes in non-cash working capital:
      Accounts receivable                                     31          24
      Inventories                                            (22)        (41)
      Prepaid expenses                                         4          (3)
      Accounts payable and accrued charges                   (22)        (22)
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                                                              (9)        (42)
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                                                             (62)        209
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    Cash flows from investing activities:
      Reduced participation in joint venture                  (5)          -
      Additions to fixed assets, net of disposals            (13)        (13)
      Proceeds on land sales                                  17           9
      Other                                                    1          (2)
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                                                               -          (6)
    Cash flows from financing activities:
      Change in operating bank loans                          70         (93)
      Increase in long-term debt                               5          17
      Repayments of long-term debt                            (2)         (3)
      Decrease in other long-term liabilities                 (2)         (5)
      Other                                                    -           1
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                                                              71         (83)
    Cash generated by continuing operations                    9         120
    Cash used by discontinued operations (note 3)             (3)         (5)
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    Foreign exchange on cash and cash equivalents
     held in foreign currencies                                -           -
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    Net increase in cash and cash equivalents                  6         115
    Cash and cash equivalents, net of bank
     indebtedness, beginning of period                        14          26
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    Cash and cash equivalents, net of bank
     indebtedness, end of period                         $    20     $   141
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    Supplemental information:
      Interest paid                                      $     4     $    21
      Income taxes paid                                  $     -     $     -
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                                 TEMBEC INC.
                  CONSOLIDATED BUSINESS SEGMENT INFORMATION
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    Quarters ended December 29, 2007 and December 30, 2006
    (unaudited) (in millions of dollars)

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                                                           December 29, 2007
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                                                              Corpo-
                         Forest                      Chemi-    rate    Conso-
                       products     Pulp    Paper     cals  & other  lidated
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    Sales:
      External          $   120  $   293  $    99  $    33  $     -  $   545
      Internal               32       18        -        1        1       52
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                            152      311       99       34        1      597

    Earnings (loss)
     before the
     following              (22)      21      (12)       2       (5)     (16)

    Depreciation and
     amortization            13       18        9        1        1       42

    Other items
     (note 7)               (17)      (4)       -        -        2      (19)

    Operating earnings
     (loss) from
     continuing
     operations             (18)       7      (21)       1       (8)     (39)
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    Net fixed asset
     additions                1       10        1        1        -       13
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                                                           December 30, 2006
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                                                              Corpo-
                         Forest                      Chemi-    rate    Conso-
                       products     Pulp    Paper     cals  & other  lidated
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    Sales:
      External          $   170  $   305  $   132  $    42  $     -  $   649
      Internal               34       22        -        1        -       57
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                            204      327      132       43        -      706

    Earnings (loss)
     before the
     following              (13)      22        9        2       (6)      14

    Depreciation and
     amortization            14       20        9        1        1       45

    Other items
     (note 7)              (246)      29        -        -        -     (217)

    Operating earnings
     (loss) from
     continuing
     operations             219      (27)       -        1       (7)     186
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    Net fixed asset
     additions                3        9        1        -        -       13
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                                 TEMBEC INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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    (in millions of dollars, unless otherwise noted)

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    1. Financial Position of the Company and Going Concern

    These consolidated financial statements are presented on the assumption
that the Company continues as a going concern in accordance with Canadian
generally accepted accounting principles (GAAP). The going concern basis of
presentation assumes that the Company will continue its operations for the
foreseeable future and will be able to realize its assets and discharge its
liabilities and commitments in the normal course of business. There is
reasonable doubt about the appropriateness of using the going concern
assumption because of the Company's current liquidity position coupled with
its expected operating cash flows. The Company must provide for annual
interest payments of $110-$120 million to service existing indebtedness and is
required to fund annual minimum capital expenditures of $60-$70 million.
    The significant appreciation of the Canadian $ against the US $ over the
past several years and the higher energy costs have led to reduced operating
margins for the Company, and for the Canadian forest products industry in
general. As well, the Company's financial performance continues to be
negatively impacted by tariffs on lumber shipped to the US. This erosion of
competitive position has led to the closure of several operations. 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. External
financial advisors have been retained to assist in the process. During the
December 2007 quarter, the Company announced a proposed recapitalization
transaction. A summary of the key elements is noted under recapitalization
(note 11).
    These financial statements assume the realization of assets and the
settlement of liabilities in the normal course of business. If the going
concern basis were not appropriate for these financial statements, adjustments
would have to be made to the carrying value of assets and liabilities,
reported revenues and expenses and balance sheet classifications.

    2. Significant accounting policies

    Basis of presentation

    These unaudited consolidated financial statements have been prepared in
accordance with Canadian GAAP using the same accounting policies and methods
as the most recent audited consolidated financial statements. These interim
consolidated financial statements should be read in conjunction with the
annual audited consolidated financial statements for the year ended
September 29, 2007.

    Changes in accounting policies

    Effective October 1, 2006, the Company changed retroactively its
accounting policy relating to the evaluation of misstatements in its financial
statements in accordance with Section 1506, Accounting Changes of the Canadian
Institute of Chartered Accountants (CICA) Handbook. The Company applied a
methodology consistent with that of the Securities and Exchange Commission
(SEC) Staff Accounting Bulletin No. 108 ("SAB 108"), Considering the Effect of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements. The Company will now quantify the effect of prior-year
misstatement on the current-year financial statements, assessing their impact
on both the financial position and results of operations of the Company and
evaluating the materiality of misstatements quantified on the above in light
of quantitative and qualitative factors. The application of this change in
accounting policy had no impact on the financial statements.
    Effective October 1, 2006, the Company adopted the new recommendations of
the CICA Handbook Section 1530, Comprehensive Income, Section 3251, Equity,
Section 3855, Financial Instruments - Recognition and Measurement, Section
3861 Financial Instruments - Disclosure and Presentation and Section 3865,
Hedges. These new Handbook Sections, which apply to fiscal years beginning on
or after October 1, 2006, provide requirements for the recognition and
measurement of financial instruments and on the use of hedge accounting.
Section 1530 establishes standards for reporting and presenting comprehensive
income, which is defined as the change in equity from transactions and other
events from non-owner sources. Other comprehensive income refers to items
recognized in comprehensive income but that are excluded from net income
calculated in accordance with GAAP.
    Under Section 3855, all financial instruments are classified into one of
these five categories: held-for-trading, held-to-maturity investments, loans
and receivables, available-for-sale financial assets or other financial
liabilities. All financial instruments and derivatives are measured in the
balance sheet at fair value except for loans and receivables, held-to-maturity
investments and other financial liabilities which are measured at amortized
cost. Subsequent measurement and changes in fair value will depend on their
initial classification, as follows: held-for-trading financial assets are
measured at fair value and changes in fair value are recognized in net income.
Available-for-sale financial instruments are measured at fair value with
changes in fair value recorded in other comprehensive income until the
instrument is derecognized or impaired. All derivative instruments, including
embedded derivatives, are recorded in the balance sheet at fair value unless
they qualify for the normal sale normal purchase exemption. All changes in
their fair value are recorded in income unless cash flow hedge accounting is
used, in which case changes in fair value are recorded in other comprehensive
income.
    As a result of the adoption of these new standards, the Company has
classified its cash and cash equivalents as held-for-trading. Accounts
receivable are classified as loans and receivables. The Company's investments
consist mainly of equity investments which are excluded from the
recommendations of this standard and of loans receivable which are classified
as loans and receivables. Bank indebtedness, operating bank loans, accounts
payable and accrued charges, long-term debt, including interest payable, and
redeemable preferred shares are classified as other liabilities, all of which
are measured at amortized cost. The Company has elected to measure all
derivatives and embedded derivatives at fair value and the Company has
maintained its policy not to use hedge accounting.
    Section 3855 also provides guidance on accounting for transaction costs
incurred upon the issuance of debt instruments or modification of a financial
liability. Transaction costs are now deducted from the financial liability and
are amortized using the effective interest method over the expected life of
the related liability. Previously recorded cumulative translation adjustment
on self-sustaining operations is now presented in Accumulated other
comprehensive income. The adoption of these new standards had no impact on the
Company's deficit position as at October 1, 2006.
    Effective October 1, 2006, the Company applied the accounting treatment
prescribed by emerging issues committee ("EIC") EIC-162 of the CICA Handbook
with respect to stock-based compensation for employees eligible to retire
before the vesting date. EIC-162 provides guidance to determine compensation
costs attributable to a stock-based award under a compensation plan that
contains a provision that allows an employee to continue vesting after the
employee has retired. The application of EIC-162 had no impact on the
financial statements of the Company.

    Business of the Company

    The Company operates an integrated forest products business. The
performance of each segment is evaluated by the management of the Company
against short-term and long-term financial objectives as well as
environmental, safety and other key criteria. The Forest Products segment
consists primarily of forest and sawmill operations, which produce lumber and
building materials. The Pulp segment includes the manufacturing and marketing
activities of a number of different types of pulps. The Paper segment consists
primarily of production and sales of newsprint and bleached board. The
Chemicals segment consists primarily of the transformation and sale of resins
and pulp by-products. Intersegment transfers of wood chips, pulp and other
services are recorded at transfer prices agreed to by the parties, which are
intended to approximate fair market value. The accounting policies used in
these business segments are the same as those described in the annual audited
consolidated financial statements.
    Prior to the June 2007 quarter, the Company allocated corporate general
and administrative expenses to each business segment based on the dollar value
of their total sales. The Company has discontinued this practice and has added
a "Corporate and Other" category to the segment information tables included in
its financial statements. Prior period segment information in the financial
statements has also been restated to conform with this change in presentation.
It is the Company's view that providing separate disclosure of corporate
general and administrative expenses will be useful to financial statement
users and will allow more accurate segment performance comparison with other
forest products companies.

    3. Discontinued operations

    In July 2007, the Company indefinitely idled its coated paper facility in
St. Francisville, Louisiana. Despite efforts to restructure the operation, the
mill's financial performance remained relatively poor. As a result of the
change in circumstances, the Company recorded an asset impairment charge of
$173 million in the June 2007 quarter. The Company has not identified a
feasible restructuring plan to resume operations at the facility. As well, the
Company has retained the services of an outside party to actively seek the
sale of the site. As this operation is the only coated paper facility owned by
the Company, its financial results have been reclassified as discontinued
operations. Comparative figures have also been reclassified to exclude the
coated paper results from the Company's continuing operations.

    Condensed earnings from discontinued operations related to the
    St. Francisville facility are as follows:

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                                                                Quarters
                                                            2007        2006
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    Sales                                                $     1     $    75
    Operating loss                                       $    (4)    $    (4)
    Financing Expenses                                   $    (1)    $     2
    Loss from discontinued operations                    $    (3)    $    (6)
    -------------------------------------------------------------------------
    Loss per common share from discontinued operations   $ (0.03)    $ (0.07)
    -------------------------------------------------------------------------
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    Condensed cash flows from discontinued operations related to the
    St.Francisville facility are as follows:

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                                                                Quarters
                                                            2007        2006
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    Cash flows from operating activities                 $    (3)    $    (3)
    Cash flows from investing activities                       -          (2)
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    Cash flows generated by discontinued operations      $    (3)    $    (5)
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    4. Long-term debt

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                                              Maturity   Dec. 29,   Sept. 29,
                                                            2007        2007
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    Tembec Inc. - 6% unsecured notes           09/2009   $    20     $    20
    Tembec Industries - US $350 million
     8.625% unsecured senior notes             06/2009       343         348
    Tembec Industries - US $500 million
     8.5% unsecured senior notes               02/2011       490         498
    Tembec Industries - US $350 million
     7.75% unsecured senior notes              03/2012       343         348
    Tembec SAS                                 12/2013        20          20
    Tembec Envirofinance SAS                   06/2017        32          32
    Tembec Energie SAS                         12/2014        10          10
    Proportionate share - Marathon (50%)       03/2006         7           7
    Proportionate share - Temlam (50%)         06/2015        43          39
    Other                                      Various        11          21
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                                                           1,319       1,343
    Less current portion                                      23          26
    Less unamortized financing costs                           2           3
    -------------------------------------------------------------------------
                                                         $ 1,294     $ 1,314
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    5. Share capital

    The following table provides the reconciliation between basic and diluted
earnings (loss) per share:


    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                Quarters
                                                            2007        2006
    -------------------------------------------------------------------------
    Net earnings (loss) from continuing operations       $   (57)    $   144
    Net earnings (loss)                                  $   (60)    $   138
    Weighted average number of common
     shares outstanding                               85,616,232  85,616,232
    Dilutive effects:
      Employees stock options                                  -     135,044
      Weighted average number of diluted common
       shares outstanding                             85,616,232  85,751,276
    Basic and diluted earnings (loss) per share
     from continuing operations                          $ (0.67)    $  1.69
    Basic and diluted earnings (loss) per share          $ (0.70)    $  1.62
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The diluted loss per share is the same as the basic loss per share as the
dilutive factors result in a decrease in the loss per share. In the case of
diluted earnings per share, the diluting factors are not significant enough to
effect a decrease in the earnings per share.
    Under the Long-Term Incentive Plan, the Company may, from time to time,
grant options to its employees. The plan provides for the issuance of common
shares at an exercise price equal to the market price of the Company's common
shares on the date of the grant. These options vest over a five-year period
and expire ten years from the date of issue. No options were granted during
the period. The compensation expense recorded was not significant.
    The following table summarizes the changes in options outstanding and the
impact on weighted average per share exercise price during the period.

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                2007                    2006
    -------------------------------------------------------------------------
                                            Weighted                Weighted
                                             average                 average
                                            exercise                exercise
                                  Shares       price      Shares       price
    -------------------------------------------------------------------------
    Balance, beginning of
     fiscal year               3,668,019     $  6.28   4,829,239     $  7.35
    Options granted                    -           -           -           -
    Options expired              (53,611)       4.31    (102,202)       5.62
    -------------------------------------------------------------------------
    Balance, end of December   3,614,408     $  6.31   4,727,037     $  7.38
    -------------------------------------------------------------------------

    6. Lumber duties and export taxes

    Effective October 12, 2006, the Governments of Canada and the United
States implemented an agreement for the settlement of the softwood lumber
dispute. The Softwood Lumber Agreement ("SLA") requires that an export tax be
collected by the Government of Canada, which is based on the price and volume
of lumber shipped. The SLA had an effective date of October 12, 2006, at which
time the U.S. Department of Commerce ("USDOC") revoked all existing
countervailing and antidumping duty orders on softwood lumber shipped to the
U.S. from Canada.

    7. Other items

    2007

    Restructuring and asset impairment charges:

    During the December 2007 quarter, the Company recorded a non-cash charge
of $2 million relating to the writedown of its investment in the failed
Gaspesia project.
    Also during the December 2007 quarter, $1 million of mill closure
provisions were reversed.

    Gain on land sales and other:

    During the December 2007 quarter, the Company completed the sale of a
number of land properties and recorded a gain of $16 million.
    Also during the December 2007 quarter, the Company reduced its
participation in the equity of AV Cell Inc. from 50% to 25% and recorded a
gain of $4 million. The Company also ceased applying the proportionate
consolidation methods to its investments and has begun applying the equity
method.

    2006

    Restructuring and asset impairment charges:

    During the December 2006 quarter, the Company announced the permanent
closure of the Smooth Rock Falls, Ontario, pulp mill. The facility had been
idled since the end of July 2006. The Company recorded a charge of $29 million
relating to special termination pension benefits, severance and other relating
items.

    Recovery of lumber duties:

    During the December 2006 quarter, the Company recorded net proceeds of
$238 million pertaining to the recovery of lumber duties on deposit with the
USDOC that had accumulated since May 2002. The amount received by the Company
corresponds to approximately 82% of the total amount deposited. In addition,
the Company received a further $30 million, which corresponds to approximately
82% of the interest accrued on the deposits since May 2002. This latter amount
was recorded as interest income.

    Gain on land sales and other:

    During the December 2006 quarter, the Company completed the sale of a
number of land and other properties and recorded a net gain of $8 million.
    Also, during the December 2006 quarter, the Company completed the sale of
its small pine lumber operation located in Brassac, France. The transaction
had no significant effect on the Company's financial statements.
    The following table provides an analysis of the other items by business
segment:

    -------------------------------------------------------------------------
                                                                        2007
                                  Forest              "Corporate     Consoli-
                                products        Pulp     & other"      dated
    -------------------------------------------------------------------------
    Investments                  $     -     $    (4)    $     2     $    (2)
    Gain on land sales               (16)          -           -         (16)
    Other                             (1)          -           -          (1)
    -------------------------------------------------------------------------
                                 $   (17)    $    (4)    $     2     $   (19)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                        2006
                                              Forest                 Consoli-
                                            products        Pulp       dated
    -------------------------------------------------------------------------

    Lumber duties                            $  (238)    $     -     $  (238)
    Pensions                                       -          17          17
    Gain on land sales                            (8)          -          (8)
    Severance, other labour-related
     and idling costs                              -          12          12
    -------------------------------------------------------------------------
                                             $  (246)    $    29     $  (217)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table provides the reconciliation components of the mill
closure provisions:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                Quarters
                                                            2007        2006
    -------------------------------------------------------------------------
    Opening balance                                      $     4     $     6
    Additions: Severance and other labour-related costs        -          10
               Idling and other costs                          -           2
    Reversal of mill closure provisions                       (1)          -
    Payments:  Severance and other labour-related costs        -          (6)
               Idling and other costs                         (1)         (1)
    -------------------------------------------------------------------------
    Ending balance                                       $     2     $    11
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    8. Interest, foreign exchange, and other

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                Quarters
                                                            2007        2006
    -------------------------------------------------------------------------
    Interest on long-term debt                           $    26     $    30
    Interest on short-term debt                                2           3
    Interest income - lumber duties                            -         (30)
    Interest income - other                                   (1)         (3)
    -------------------------------------------------------------------------
                                                              27           -

    Amortization of deferred financing costs                   1           1
    Loss (gain) on consolidation of foreign
     integrated subsidiaries                                  (1)          1
    Other foreign exchange items                               3         (17)
    Bank charges and other financing expenses                  1           1
    -------------------------------------------------------------------------
                                                               4         (14)
    -------------------------------------------------------------------------
                                                         $    31     $   (14)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    9. Income Taxes

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                Quarters
                                                            2007        2006
    -------------------------------------------------------------------------
    Earnings (loss) from continuing operations
     before income taxes and share in earnings
     of related companies                                $   (54)    $   139
    -------------------------------------------------------------------------
    Income taxes based on combined federal and
     provincial income tax rates of 31.9%
     (2006 - 33.3%)                                          (17)         46
    Decrease (increase) resulting from:
      Future income taxes adjustment due to
       rate enactments                                         3           -
      Change in valuation allowance                           21         (55)
      Rate differential between jurisdictions                  1          (3)
      Non taxable portion of exchange loss (gain)
       on long-term debt                                      (2)          8
      Other permanent differences                             (3)          -
      Large corporations tax                                   -           -
    -------------------------------------------------------------------------
                                                              20         (50)
    -------------------------------------------------------------------------
    Income taxes expense (recovery)                      $     3     $    (4)
    -------------------------------------------------------------------------
    Income taxes:
      Current                                                  -          38
      Future                                                   3         (42)
    -------------------------------------------------------------------------
    Income taxes expense (recovery)                      $     3     $    (4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    10. Employee Future Benefits

    The following table presents the Company's future benefit costs:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                Quarters
                                                            2007        2006
    -------------------------------------------------------------------------
    Defined benefit pension plans                        $     4     $     5
    Other employee future benefit plans                        1           1
    Defined contribution and other retirement plans            3           3
    -------------------------------------------------------------------------
                                                               8           9

    Portion included in Restructuring charge -
     mill closure (note 7)                                     -          17
    -------------------------------------------------------------------------
                                                         $     8     $    26
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    11. Recapitalization

    The following is the summary of the key elements for the recapitalization
transaction proposed by the Company:

    Implementation Process

    Details of the Recapitalization were provided in an information circular
distributed to Noteholders and existing shareholders on January 25, 2008. In
addition to Noteholder and shareholder approvals, implementation of the Plan
of Arrangement is subject to final approval of the Court and receipt of all
necessary regulatory and stock exchange approvals.
    All of the existing equity of Tembec will be surrendered and
100,000,000 new common shares ("New Shares") in the recapitalized Tembec will
be issued.

    Treatment of Existing Unsecured Notes

    - The unsecured notes issued by Tembec Industries Inc. ("Notes") and
      listed below will be affected by the Recapitalization:
           - US $350,000,000 8.625% notes due June 2009
           - US $500,000,000 8.5% notes due February 2011
           - US $350,000,000 7.75% notes due March 2012

    - Existing holders of Notes ("Noteholders") will receive 95% of the
      recapitalized equity of Tembec as follows:

          (i)   Noteholders will surrender their Notes in exchange for their
                pro rata share, based on the face amount of Notes held, of
                45% of the recapitalized equity of Tembec (37.5 New Shares
                for each US $1,000 of face amount of Notes);

          (ii)  Under the terms of the Recapitalization plan, Noteholders
                will be paid accrued interest on the Notes up to and
                including December 30, 2007;

          (iii) In addition, qualifying Noteholders will have an opportunity
                to participate (the "Loan Participation Process") as lenders
                in amounts up to their pro rata share, based on the face
                amount of Notes held, of a new term loan (the "New Loan") in
                a maximum principal amount of US $300 million. Those
                qualifying Noteholders who participate in the New Loan will
                receive their pro rata share, based on the amount of their
                participation in the New Loan, of 43% of the recapitalized
                equity of Tembec. The minimum participation amount shall be
                US $250,000.
                In effect, for every US $1,000,000 of face value of Notes
                held by an existing Noteholder, such Noteholder may
                participate in lending up to US $250,000 of the New Loan and
                will be entitled to receive up to approximately
                35,833 additional New Shares.
                The deadline for making a commitment to participate in the
                New Loan is expected to be approximately mid-February 2008;

          (iv)  Existing Noteholders who participate in a backstop of the
                New Loan will be entitled to an additional 7% of the
                recapitalized equity of Tembec.

    Support Agreements

    An ad hoc committee of Noteholders (the "Committee") has executed support
agreements with Tembec whereby they have agreed to vote in favour of and
support the Recapitalization. The Committee holds in excess of US $250 million
of Notes. As at December 31, 2007, noteholders have executed support
agreements with the Company whereby they have agreed to vote approximately
US $774 million of notes in favor of and to support the Recapitalization.

    Treatment of Certain Other Obligations

    As part of the implementation of the Recapitalization, Investissement
Québec ("IQ") and Société générale de financement du Québec ("SGF") will
receive a replacement 6% unsecured note of Cdn $18 million in exchange for the
Cdn $20.1 million note currently held by IQ and the Cdn $25.7 million of
preferred shares held by IQ and SGF. The approval of IQ and SGF will be
required as part of the Recapitalization transaction.

    Treatment of Existing Shares

    - Existing shareholders of Tembec Inc. will receive their pro rata
share of:

          (i)   5,000,000 New Shares. For each 100 existing common shares in
                the capital of Tembec Inc., an existing shareholder will
                receive 5.84 New Shares; and

          (ii)  "cashless" warrants to acquire 11,111,111 New Shares issued
                from treasury. The warrants shall be deemed to be exercised
                and shall be automatically converted to New Shares if the
                20-day volume weighted average trading price of the New
                Shares reaches Cdn $12.00 (the "Strike Price"). No
                consideration is payable by the warrant holder to acquire the
                New Shares once the Strike Price has been reached. For each
                100 existing common shares in the capital of Tembec Inc., an
                existing shareholder will receive approximately 12.9778
                warrants and each warrant will be convertible into one New
                Share. The warrants will expire four years after the
                implementation date of the Recapitalization.

    No fractional New Shares or warrants will be issued in the
Recapitalization.

    Terms of the New Loan

    The following is a summary of selected terms of the New Loan:


    Borrower:           Tembec Industries Inc. ("TII")

    Amount:             US $300,000,000

                        - The full amount of the New Loan will be drawn on
                          implementation date of the Recapitalization

    Use of proceeds:    - Repayment of working capital facilities, capital
                          expenditures and general corporate purposes

    Term:               - Four years from the implementation date of the
                          Recapitalization

    Guarantors          - Tembec Inc.
                        - Tembec Enterprises Inc. ("TEI")
                        - All present and future material Canadian and U.S.
                          wholly-owned subsidiaries of Tembec Inc, TII and
                          TEI

    Security            - First charge on all assets other than receivables
                          and inventory of the Borrower and the Guarantors
                        - Second charge on all receivables and inventory,
                          subject to the prior charge of a working capital
                          facility

    Interest rate:      - Base Rate Loans: Base Rate + 6.0%
                        - LIBOR Loans: LIBOR + 7.0%

    Covenants           - Certain covenants with respect to debt incurrence,
                          permitted liens, fundamental changes, limitations
                          on guarantees and transactions with affiliates
                        - A financial maintenance covenant that matches the
                          covenant in the company's existing working capital
                          facility, as amended from time to time

    Prepayment          - Prepayable at any time with a prepayment premium
                          of:
                             - Year 1: 4%
                             - Year 2: 3%
                             - Year 3: 2%
                             - Year 4: 0%

    12. Comparative figures

    Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted.
    







For further information:

For further information: Michel J. Dumas, Executive Vice President,
Finance & CFO, (819) 627-4268, michel.dumas@tembec.com; John Valley, Executive
Vice President, Business Development and Corporate Affairs, (416) 775-2819,
john.valley@tembec.com; Source: Tembec Inc.


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