Tembec reports financial results for its third quarter ended June 28, 2008



    MONTREAL, Aug. 1 /CNW Telbec/ - Consolidated sales for the three-month
period ended June 28, 2008 were $609 million, down from $712 million in the
comparable period of the prior year. The Company generated a net loss of
$27 million or $0.27 per share in the June quarter compared to a net loss of
$164 million or $1.91 per share in the comparable three-month period of the
prior year. Earnings before unusual items, interest, income taxes,
depreciation, amortization and other non-operating expenses (EBITDA) was
$9 million for the three-month period ended June 28, 2008, as compared to
EBITDA of $4 million a year ago and negative EBITDA of $1 million in the prior
quarter.
    At the Board of Directors meeting today, management presented an update
of its selling, general and administrative (SG&A) expense reductions. Total
consolidated SG&A expenses for fiscal 2008 are projected to decrease by
$32 million from 2007 and $49 million from 2006. Corporate general and
administrative expenses included in the above figures will have declined by
$6 million and $24 million during the same period. Management also presented
to the Board new cash generation goals based on working capital reductions and
asset sales.

    Business Segment Results
    ------------------------

    The Forest Products segment generated negative EBITDA of $10 million on
sales of $145 million. This compares to negative EBITDA of $31 million on
sales of $153 million in the prior quarter. Sales declined by $8 million, with
lower by-product sales offsetting higher prices and volumes for lumber and
engineered wood. US $ reference prices for random lumber increased by
approximately US $25 per mbf while stud lumber increased by US $29 per mbf.
Currency did not affect pricing as the Canadian $ averaged US $0.991, a small
decrease from US $0.997 in the prior quarter. The net price effect was an
increase in EBITDA of $4 million or $16 per mbf. Operating costs were lower as
the warmer spring and summer months have a positive effect on sawmill
operating efficiencies. The current quarter also benefited from a $14 million
favourable adjustment to the carrying values of log and lumber inventories as
increasing lumber selling prices led to higher projected net realizable
values. During the quarter, the Company incurred $3 million of lumber export
taxes, up from $2 million in the prior quarter. Higher selling prices
generated the higher export taxes. 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 June quarter, the Company
incurred a tax of 5% on Eastern shipments and 15% on Western shipments,
unchanged from the prior quarter. During the quarter, the Company announced
the extension of lumber capacity curtailments and new curtailments amounting
to 600 million board feet of annual production and affecting approximately
800 employees.
    The Pulp segment generated EBITDA of $19 million on sales of $369 million
for the quarter ended June 2008 compared to EBITDA of $42 million on sales of
$369 million in the March 2008 quarter. Sales were unchanged, with higher
selling prices being offset by lower shipments. US $ reference prices
increased for most grades of pulp. Currency did not affect pricing as the
Canadian $ averaged US $0.991, a small decrease from US $0.997 in the prior
quarter. The total price effect was an increase of $35 per tonne, increasing
EBITDA by $16 million. Mill level costs increased by $34 million, primarily
due to significantly higher maintenance costs. In the prior quarter, the
Company incurred only 200 tonnes of downtime. During the most recent quarter,
total downtime was 26,400 tonnes as millwide maintenance shutdowns were taken
at five pulp mills. The segment was also negatively impacted by higher fibre,
energy, chemical and transportation costs. As well, the stronger Euro led to a
$6 million increase in the reported costs of the three French pulp mills.
Inventories were at 24 days of supply at the end of June, down from only
25 days at the end of March 2008. These are relatively low levels indicative
of the strength of the current pulp market.
    The Paper segment generated EBITDA of $3 million on sales of
$112 million. This compares to negative EBITDA of $7 million on sales of
$98 million in the prior quarter. The sales increase of $14 million was due to
higher effective prices and shipments. The US $ reference price for newsprint
increased by US $57 per tonne while the reference price for coated bleached
board increased by US $30 per short ton. Currency did not affect pricing as
the Canadian $ averaged US $0.991, a small decrease from US $0.997 in the
prior quarter. The net price effect was an increase of $58 per tonne,
increasing EBITDA by $8 million. During the June quarter, manufacturing costs
were favourably impacted by a $3 million incentive provided through the
Manitoba Government's Coal Reduction program for progress made at the Pine
Falls newsprint facility. The Company incurred 35,100 tonnes of market related
downtime and 1,000 tonnes of maintenance downtime in the June 2008 quarter
compared to 17,100 tonnes of market related downtime and 500 tonnes of
maintenance downtime in the prior quarter. One of the three newsprint machines
at the Kapuskasing mill was idle for the entire June 2008 quarter and the
coated board machine at the Temiscaming Complex was idled for three weeks to
reduce inventory levels.

    Outlook
    -------

    Overall, the June quarterly operating results were an improvement over
the previous quarter, but remained well below acceptable levels. The extremely
low US $ lumber selling prices experienced over the last several quarters
continues to depress earnings. Looking ahead, lumber markets will remain
challenging as there are no clear signs of a U.S. housing recovery. Pulp
markets are expected to remain stable. Newsprint prices increased in the June
quarter and additional increases are anticipated during the September quarter,
but at a reduced pace. As for the Company, it will continue to focus on
controllable items such as costs and operating efficiency. However, the
unprecedented increase in fossil fuel prices is negatively impacting the
Company's cost reduction efforts. While direct energy usage reductions are a
priority item, approximately 75% of the impact of the higher fuel costs is
related to purchased items, mainly wood deliveries, transportation and
chemicals. The Company recently announced a US $100 per metric tonne energy
related surcharge on its specialty dissolving pulps. If global energy prices
remain at these lofty levels, manufacturers will have to increase selling
prices well beyond normal historical levels to earn satisfactory margins.
While the recent recapitalization transaction has significantly improved the
Company's liquidity, balance sheet leverage and debt service requirements, the
Company is not yet cash flow positive and this continues to be an area of
considerable focus.

    Tembec is a large, diversified and integrated forest products company
which stands as the global leader in sustainable forest management practices.
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 TMB and warrants under TMB.WT.
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. 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.



    
    -------------------------------------------------------------------------
                                 TEMBEC INC.
                         CONSOLIDATED BALANCE SHEETS
    -------------------------------------------------------------------------

    (unaudited) (in millions of dollars)

                                                            The          The
                                                        Company  Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                           June 28,     Feb. 29,     Sep. 29,
                                              2008         2008         2007
                                                        (Note 1)    (Audited)
    -------------------------------------------------------------------------
    ASSETS
    Current Assets:
      Cash and cash equivalents              $ 106        $ 116         $ 14
      Accounts receivable                      371          344          347
      Inventories (note 1)                     440          458          436
      Prepaid expenses                          24           20           15
      Current assets from discontinued
       operations (note 2)                       3            5           18
    -------------------------------------------------------------------------
                                               944          943          830

    Investments                                  9           29           28
    Fixed assets                               696          704        1,584
    Other assets                                49           44          146
    Future income taxes                          -            -           67
    -------------------------------------------------------------------------
                                           $ 1,698      $ 1,720      $ 2,655
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current liabilities:
      Bank indebtedness                       $ 20          $ 7         $  -
      Operating bank loans                      70           62           89
      Accounts payable and accrued charges     344          351          363
      Interest payable                           3            -           17
      Current portion of long-term debt
       (note 3)                                 21           21           26
      Current liabilities related to
       discontinued operations (note 2)          3            2            6
    -------------------------------------------------------------------------
                                               461          443          501

    Long-term debt (note 3)                    422          414        1,314
    Other long-term liabilities and
     credits (note 4)                          223          231          125
    Future income taxes                         27           24           93
    Minority interest                            -            -            5
    Redeemable preferred shares                  -            -           26
    Non-current liabilities related to
     discontinued operations (note 2)           38           38           25
    Shareholders' equity:
      Share capital (note 5)                   570          570          831
      Contributed surplus                        1            -            9
      Accumulated other comprehensive loss       -            -           (3)
      Retained earnings (deficit)              (44)           -         (271)
    -------------------------------------------------------------------------
                                               527          570          566
    -------------------------------------------------------------------------
                                           $ 1,698      $ 1,720      $ 2,655
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                 TEMBEC INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
    -------------------------------------------------------------------------

    (unaudited) (in millions of dollars, unless otherwise noted)

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Sales          $ 609        $ 797        $ 712        $ 950      $ 2,075
    Freight and
     sales
     deductions       77           99           83          111          238
    Lumber export
     taxes (note 6)    3            4            5            4           13
    Cost of sales    496          652          585          804        1,681
    Selling,
     general and
     administrative   24           33           35           48          101
    Depreciation
     and
     amortization     24           32           41           72          129
    Recovery of
     lumber duties
     (note 7)          -            -            -            -         (238)
    Restructuring
     and asset
     impairment
     charges
     (note 7)          -            -           (2)           -           27
    Gain on land
     sales and
     other (note 7)   (2)          (2)          (1)         (20)         (13)
    -------------------------------------------------------------------------
    Operating
     earnings
     (loss) from
     continuing
     operations      (13)         (21)         (34)         (69)         137
    Interest,
     foreign
     exchange and
     other (note 8)   14            5           53           32           75
    Exchange loss
     (gain) on
     long-term debt   (4)          12         (111)          (9)         (63)
    -------------------------------------------------------------------------
    Earnings (loss)
     from continuing
     operations
     before income
     taxes and
     share of
     earnings of
     related
     companies       (23)         (38)          24          (92)         125
    Income tax
     expense
     (recovery)
     (note 9)          2            2            3            6           (2)
    Share in losses
     (earnings)
     of related
     companies         -            -            2            -           (1)
    -------------------------------------------------------------------------
    Net earnings
     (loss) from
     continuing
     operations      (25)         (40)          19          (98)         128
    Loss from
     discontinued
     operations
     (note 2)         (2)          (4)        (183)          (4)        (199)
    -------------------------------------------------------------------------
    Net loss       $ (27)       $ (44)      $ (164)      $ (102)       $ (71)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic and
     diluted
     earnings
     (loss) per
     share from
     continuing
     operations
     (note 5)    $ (0.25)     $ (0.40)      $ 0.23      $ (1.14)      $ 1.50
    Basic and
     diluted loss
     per share
     from
     discontinued
     operations
     (note 5)    $ (0.02)     $ (0.04)     $ (2.14)     $ (0.05)     $ (2.33)
    Basic and
     diluted loss
     per share
     (note 5)    $ (0.27)     $ (0.44)     $ (1.91)     $ (1.19)     $ (0.83)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                 TEMBEC INC.
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
    -------------------------------------------------------------------------

    (unaudited) (in millions of dollars)

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Net loss       $ (27)       $ (44)      $ (164)      $ (102)       $ (71)
    Other
     comprehensive
     income (loss):
    Exchange
     translation
     of foreign
     subsidiaries      -            -            -            -            -
    -------------------------------------------------------------------------
    Comprehensive
     loss          $ (27)       $ (44)      $ (164)      $ (102)       $ (71)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
           CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
    -------------------------------------------------------------------------

    (unaudited) (in millions of dollars)

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Retained
     earnings
     (deficit),
     beginning
     of period     $ (17)        $  -       $ (129)      $ (271)      $ (249)
    Adjustment
     resulting
     from a
     change in
     accounting
     policies          -            -            -            -           27
    -------------------------------------------------------------------------
    Restated
     retained
     earnings
     (deficit),
     beginning
     of period       (17)           -         (129)        (271)        (222)
    Net loss         (27)         (44)        (164)        (102)         (71)
    -------------------------------------------------------------------------
                     (44)         (44)        (293)        (373)        (293)
    Adjustment
     for fresh start   -            -            -          373            -
    -------------------------------------------------------------------------
    Retained
     earnings
     (deficit),
     end of
     period        $ (44)       $ (44)      $ (293)      $    -       $ (293)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                 TEMBEC INC.
                     CONSOLIDATED STATEMENT OF CASH FLOW
    -------------------------------------------------------------------------

    (unaudited) (in millions of dollars)

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Cash flows
    from operating
    activities:
      Net loss     $ (27)       $ (44)      $ (164)      $ (102)       $ (71)
      Adjustments
       for:
        Loss from
         discontinued
         operations
         (note 2)      2            4          183            4          199
        Depreciation
         and amorti-
         zation       24           32           41           72          129
        Unrealized
         foreign
         exchange
         and others
         (note 8)      2            1           (3)          (2)           3
        Exchange loss
         (gain) on
         long-term
         debt         (4)          12         (111)          (9)         (63)
        Future income
         taxes
         (recovery)
         (note 9)      2            2            7            6          (36)
        Investment
         tax credits  (2)          (4)          (6)          (7)          27
        Restructuring
         and asset
         impairment
         charges
         (note 7)      -            -            3            -           20
        Gain on land
         sales and
         other
         (note 7)     (2)          (2)           -          (20)         (12)
        Differences
         between cash
         contributions
         and pension
         expense      (5)          (7)          (5)          (8)         (13)
        Other         (1)           3            2            5            2
    -------------------------------------------------------------------------
                     (11)          (3)         (53)         (61)         185
    Changes in
     non-cash
     working capital:
      Accounts \
       receivable      3          (18)           7           22          (12)
      Inventories     43           22           96          (54)          (9)
      Prepaid
       expenses       (3)          (4)           4           (4)          (4)
      Accounts
       payable and
       accrued
       charges         1          (17)          11          (26)          (1)
    -------------------------------------------------------------------------
                      44          (17)         118          (62)         (26)
    -------------------------------------------------------------------------
                      33          (20)          65         (123)         159
    -------------------------------------------------------------------------
    Cash flows from
     investing
     activities:
      Reduced
       participation
       in joint
       venture         -            -            -           (5)           -
      Additions to
       fixed assets  (19)         (23)         (22)         (23)         (50)
      Proceeds on
       land sales      -            -            1           17           12
      Decrease in
       investments    22           22            1            2            1
      Other            -            -           (2)           1           (2)
    -------------------------------------------------------------------------
                       3           (1)         (22)          (8)         (39)
    Cash flows from
     financing
     activities:
      Change in
       operating
       bank loans     (1)           8          (36)         (27)        (123)
      Increase in
       long-term debt  3            3            3          300           43
      Repayment of
       long-term debt (6)          (7)          (4)          (5)         (13)
      Increase
       (decrease)
       in other
       long-term
       liabilities    (2)          (4)           3           (3)           -
      Recapitali-
       zation fees
       and other       3            3            1          (36)           -
    -------------------------------------------------------------------------
                      (3)           3          (33)         229          (93)
    Cash used by
     continuing
     operations       33          (18)          10           98           27
    Cash used by
     discontinued
     operations
     (note 2)         (2)          (4)          (8)          (4)         (21)
    -------------------------------------------------------------------------
    Foreign exchange
     on cash and cash
     equivalents
     held in foreign
     currencies       (1)          (1)          (1)           1           (1)
    -------------------------------------------------------------------------
    Net increase
     (decrease) in
     cash and cash
     equivalents      30          (23)           1           95            5
    Cash and cash
     equivalents,
     net of bank
     indebtedness,
     beginning of
     period           56          109           30           14           26
    -------------------------------------------------------------------------
    Cash and cash
     equivalents,
     net of bank
     indebtedness,
     end of period  $ 86         $ 86         $ 31        $ 109         $ 31
    -------------------------------------------------------------------------
    Supplemental
     information:
      Interest paid $ 10         $ 10         $ 22         $ 48         $ 87
      Income taxes
       paid
       (recovered)  $  -         $  -          $ 1         $ (1)         $ 3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                 TEMBEC INC.
                  CONSOLIDATED BUSINESS SEGMENT INFORMATION
    -------------------------------------------------------------------------

    (unaudited) (in millions of dollars)

                                                                 The Company
                                                          Three months ended
                                                               June 28, 2008
    -------------------------------------------------------------------------
                    Forest                               Corporate   Consoli-
                  products      Pulp     Paper Chemicals   & other     dated
    -------------------------------------------------------------------------
    Sales:
      External       $ 113     $ 353     $ 112      $ 31      $  -     $ 609
      Internal          32        16         -         2         -        50
    -------------------------------------------------------------------------
                       145       369       112        33         -       659

    Earnings (loss)
     before the
     following         (10)       19         3         3        (6)        9
    Depreciation and
     amortization        7        15         1         1         -        24
    Other items
     (note 7)            -         -         -         -        (2)       (2)
    Operating
     earnings (loss)
     from continuing
     operations        (17)        4         2         2        (4)      (13)
    -------------------------------------------------------------------------
    Net fixed asset
     additions           2        16         1         -         -        19
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                             The Predecessor
                                                          Three months ended
                                                               June 30, 2007
    -------------------------------------------------------------------------
                    Forest                               Corporate   Consoli-
                  products      Pulp     Paper Chemicals   & other     dated
    -------------------------------------------------------------------------
    Sales:
      External       $ 178     $ 362     $ 128      $ 44      $  -     $ 712
      Internal          34        18         -         1         -        53
    -------------------------------------------------------------------------
                       212       380       128        45         -       765

    Earnings (loss)
     before the
     following         (21)       33        (1)        2        (9)        4
    Depreciation and
     amortization       13        17         9         1         1        41
    Other items
     (note 7)            -         -        (3)        -         -        (3)
    Operating
     earnings (loss)
     from continuing
     operations        (34)       16        (7)        1       (10)      (34)
    -------------------------------------------------------------------------
    Net fixed asset
     additions           5        16         1         -         -        22
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                 TEMBEC INC.
                  CONSOLIDATED BUSINESS SEGMENT INFORMATION
    -------------------------------------------------------------------------

    (unaudited) (in millions of dollars)

                                                                 The Company
                                                           Four months ended
                                                               June 28, 2008
    -------------------------------------------------------------------------
                    Forest                               Corporate   Consoli-
                  products      Pulp     Paper Chemicals   & other     dated
    -------------------------------------------------------------------------
    Sales:
      External       $ 149     $ 465     $ 144      $ 39      $  -     $ 797
      Internal          46        20         -         3         -        69
    -------------------------------------------------------------------------
                       195       485       144        42         -       866

    Earnings (loss)
     before the
     following         (20)       32         2         3        (8)        9
    Depreciation and
     amortization       10        20         1         1         -        32
    Other items
     (note 7)            -         -         -         -        (2)       (2)
    Operating
     earnings (loss)
     from continuing
     operations        (30)       12         1         2        (6)      (21)
    -------------------------------------------------------------------------
    Net fixed asset
     additions           2        19         2         -         -        23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                             The Predecessor
                                                           Five months ended
                                                           February 29, 2008
    -------------------------------------------------------------------------
                    Forest                               Corporate   Consoli-
                  products      Pulp     Paper Chemicals   & other     dated
    -------------------------------------------------------------------------
    Sales:
      External       $ 196     $ 533     $ 165      $ 56      $  -     $ 950
      Internal          59        31         -         1         2        93
    -------------------------------------------------------------------------
                       255       564       165        57         2     1,043

    Earnings (loss)
     before the
     following         (43)       50       (18)        4       (10)      (17)
    Depreciation and
     amortization       23        31        15         1         2        72
    Other items
     (note 7)          (18)       (3)       (1)        -         2       (20)
    Operating
     earnings (loss)
     from continuing
     operations        (48)       22       (32)        3       (14)      (69)
    -------------------------------------------------------------------------
    Net fixed asset
     additions           2        19         2         1        (1)       23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                             The Predecessor
                                                           Nine months ended
                                                               June 30, 2007
    -------------------------------------------------------------------------
                    Forest                               Corporate   Consoli-
                  products      Pulp     Paper Chemicals   & other     dated
    -------------------------------------------------------------------------
    Sales:
      External       $ 522   $ 1,031     $ 393     $ 129      $  -   $ 2,075
      Internal         107        58         -         3         1       169
    -------------------------------------------------------------------------
                       629     1,089       393       132         1     2,244

    Earnings (loss)
     before the
     following         (55)       98        15         7       (23)       42
    Depreciation and
     amortization       41        55        27         3         3       129
    Other items
     (note 7)         (250)       29        (3)        -         -      (224)
    Operating
     earnings (loss)
     from continuing
     operations        154        14        (9)        4       (26)      137
    -------------------------------------------------------------------------
    Net fixed asset
     additions          11        35         3         1         -        50
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                 TEMBEC INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    -------------------------------------------------------------------------

    (unaudited) (in millions of dollars, unless otherwise noted)

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    1. Basis of presentation

    Plan of arrangement

    On December 19, 2007, Tembec Inc. (the "Predecessor") announced a proposed
recapitalization transaction and that it had executed support agreements with
an ad hoc committee of noteholders.
    On January 25, 2008, details of the proposed recapitalization were
provided in an information circular and distributed to noteholders and
existing shareholders.
    On February 22, 2008, the plan of arrangement and recapitalization (the
"Plan") was approved by noteholders and existing shareholders.
    On February 29, 2008, the Predecessor implemented the plan having the
following key elements:

    - Conversion of US $1.2 billion of the Predecessor's senior unsecured
      debt into equity of the "Company";
    - Noteholders received 88% of the equity of the Company in full
      settlement of their notes;
    - An additional 7% of the equity of the Company was allocated to
      noteholders who backstopped the new loan described below;
    - Existing shareholders received 5% of the equity of the Company and
      "cashless" warrants to acquire additional shares; and
    - A new four-year term loan of US $300 million was implemented to provide
      additional liquidity.

    The Company's balance sheet as at February 29, 2008 has been prepared
under the provisions of the Canadian Institute of Chartered Accountants
("CICA") Handbook Section ("HB") 1625, "Comprehensive Revaluation of Assets
and Liabilities" ("fresh start accounting"). Under fresh start accounting, the
Company was required to determine its enterprise value. The enterprise value
of $570 million was determined based on the fair value of the unsecured debt
converted into equity and of the issuance of common shares and cashless
warrants to the shareholders of the Predecessor. In conjunction with the
Predecessor's reorganization proceedings, independent third party valuations
were also obtained to assist with the allocation of the fair value to the
individual assets and liabilities.
    The Predecessor's financial information has been presented to provide
additional information for the reader. In reviewing the Predecessor's
financial information, readers are reminded that they do not reflect the
effects of the financial reorganization or the application of its accounting
described below. Certain amounts presented in the Predecessor's financial
information have been reclassified to conform with the presentation adopted by
the Company.
    The following table summarizes the impact of adjustments required to
implement the Plan and to reflect the adoption of fresh start accounting:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                 Feb. 29,                Adjustments                 Feb. 29,
                    2008  -----------------------------------------     2008
                 Balance      Plan of       Equity        Fresh      Balance
                   prior      Arrange-   and Other        Start        after
                 to Plan         ment    Financing       Accoun-        Plan
                Implemen-                    Trans-        ting
                  tation                   actions
    -------------------------------------------------------------------------
    Assets
    Current assets:
      Cash and cash
       equivalents  $ 15         $  -        $ 101(3)      $  -        $ 116
      Accounts
       receivable    341            -            -            3(5e)      344
      Inventories    488            -            -          (30)(5a)     458
      Prepaid
       expenses       20            -            -            -           20
      Current
       assets from
       discontinued
       operations      5            -            -            -            5
    -------------------------------------------------------------------------
                     869            -          101          (27)         943
    Investments       30            -            -           (1)(5b)      29
    Fixed assets   1,515            -            -         (811)(5a)     704
    Other assets     194            -          (12)(2)     (114)(5c)      44
                                               (24)(3)
    Future income
     taxes            45            -            -          (45)(5e)       -
    -------------------------------------------------------------------------
                 $ 2,653         $  -         $ 65       $ (998)     $ 1,720
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
     and
     Shareholders'
     Equity
    Current
     liabilities:
      Bank
       indebtedness  $ 7         $  -         $  -         $  -          $ 7
      Operating
       bank loans    227            -         (165)(3)        -           62
      Accounts
       payable and
       accrued
       charges       354            -           (4)(3)        1(5e)      351
      Interest
       payable        25            -          (25)(3)        -            -
      Current
       portion of
       long-term
       debt           21            -            -            -           21
      Current
       liabilities
       related to
       discontinued
       operations      2            -            -            -            2
    -------------------------------------------------------------------------
                     636            -         (194)           1          443
    Long-term
     debt          1,302       (1,181)(1)      295(3)         -          414
                                                (2)(4)
    Unamortized
     financing
     items            (2)           2(1)       (24)(3)       24(5c)        -
    Other long-term
     liabilities     125            -            -          106(5d)      231
    Future income
     taxes            77            -            -          (53)(5e)      24
    Redeemable
     preferred
     shares           26            -          (26)(4)        -            -
    Non-current
     liabilities
     related to
     discontinued
     operations       25            -            -           13(5d)       38
    Shareholders'
     equity:
      Share capital  831            -          558(2)      (819)(6a)     570
      Contributed
       surplus         9        1,179(1)      (570)(2)     (618)(6b)       -
                                                28(4)       (28)(6b)
      Accumulated
       other
       comprehensive
       loss           (3)           -            -            3(6b)        -
      Deficit       (373)           -            -          373(6b)        -
    -------------------------------------------------------------------------
                     464        1,179           16       (1,089)         570
    -------------------------------------------------------------------------
                 $ 2,653         $  -         $ 65       $ (998)     $ 1,720
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Plan of arrangement adjustments

    In conjunction with the Plan of Arrangement approved by the Ontario
Superior Court of Justice, certain amounts classified as "Accounts payable and
accrued liabilities" and "Long-term debt" were subject to recapitalization.
Liabilities subject to recapitalization recorded as at February 29, 2008
amounted to $1,179 million.

    Under the Plan of Arrangement, the capital reorganization provided for the
following:

    (1) The cancellation of the Indentures and the irrevocable extinguishment
        and elimination of all of the Noteholders' entitlements with respect
        to the Existing Notes and the Indentures. Such Noteholders' were
        entitled to their pro rata share, based on the face amount of
        Existing Notes held, of 45% of the recapitalized equity of the
        Company. In addition, Noteholders had an opportunity to participate
        as lenders in the New Loan and be entitled to an additional 43% of
        the recapitalized equity of the Company (see below).

    Equity and other financial transaction adjustments

    (2) As part of the Plan of Arrangement, Noteholders received 95% or
        95 million New Common Shares of the recapitalized equity of the
        Company having a fair value of $542 million of the total of
        $570 million. Issuance costs amounted to $12 million.

    (3) As part of the Plan of Arrangement, Qualifying Noteholders had the
        opportunity to participate in the New Loan in a maximum principal
        amount of US $300 million. Gross proceeds of $295 million were used
        to pay $4 million of fees and $25 million of unpaid Noteholders
        interest to the end of December. An amount of $165 million was set
        aside to repay the CIT facility. The balance will be used for capital
        expenditures and general corporate purposes. Fees amounted to
        $24 million.

    (4) The Company refinanced the 6% Investissement Québec notes having a
        total carrying value of $20 million with a new $18 million 6% note
        having a maturity of September 30, 2011. The Class B Series 2 and
        Class B Series 4 shares totaling $26 million were cancelled without
        consideration.

    Fresh start accounting adjustments

    As a result of the substantial realignment of equity and non-equity
interests, the identifiable assets and liabilities of the Company have been
revalued to reflect the expected fair values of such assets and liabilities,
as required under the CICA Handbook Section 1625 - Comprehensive Revaluation
of Assets and Liabilities ("CICA 1625"). The process of undertaking such a
comprehensive revaluation is commonly referred to as "fresh start accounting".
    The Company was required to perform a comprehensive balance sheet
revaluation under the provisions of CICA 1625. Under fresh start accounting,
the Company performed an assessment of the fair value of identifiable assets
and liabilities, whether or not previously recorded. The adjustments were to
revalue assets and liabilities that met the recognition criteria under
Canadian Generally Accepted Accounting Principles ("GAAP") on a new cost
basis. Under CICA 1625, goodwill is not recorded even if the net fair value of
identifiable assets and liabilities is less than the fair value of the Company
equity upon the Implementation Date.
    For purposes of this unaudited consolidated balance sheet, the fair values
ascribed to the assets and liabilities are fair values as at February 29, 2008
and are based on the guidance provided in CICA Handbook Section 1581 -
Business Combinations. These fair values are subject to change to the extent
of further valuation reports and analysis.

    (5) The fair value adjustments are as follows:

        (a) The carrying value of "inventories" are adjusted to reflect
            estimated fair value;

        (b) "Investments" are adjusted to fair value;

        (c) "Other assets" and "Deferred credits" including deferred
            financing costs, goodwill, timber and cutting rights are adjusted
            to nil;

        (d) "Pension assets and employee future benefit obligations included
            in "other long-term liabilities" are adjusted to reflect the
            accrued benefit obligation based on management's best estimate
            assumptions on a going forward basis; plan assets are adjusted to
            fair value; and

        (e) "Future income taxes" have been adjusted to reflect the tax
            effects of differences between the fair value of identifiable
            assets and liabilities and their estimated tax bases and the
            benefits of any unused tax losses and other deductions to the
            extent that these amounts are more likely than not to be
            realized. The resulting future income tax amounts have been
            measured based on the rates substantively enacted that are
            expected to apply when the temporary differences reverse or the
            unused tax losses and other reductions are realized. This future
            income tax liability does not represent an actual cash tax
            liability due by the Company. In addition, the Company has
            reflected a valuation allowance against certain of its estimated
            future income tax assets. Any reversal of this valuation
            allowance in future periods will result in a credit to
            shareholders' equity. The estimated future income tax assets are
            based on numerous assumptions and dependent upon complex tax
            issues including the quantum of debt forgiveness that must be
            recognized by the Company. Consequently, the actual future income
            tax assets may depart from the ones disclosed herein.

    (6) Shareholders' equity adjustments relate to:

        (a) the net fair value adjustment to assets and liabilities; and

        (b) the reclassification of the "Deficit" and other "Shareholders'
            equity" balances that arose prior to the fresh start to share
            capital.

    Significant accounting policies

    These consolidated financial statements are prepared in accordance with
Canadian GAAP, which require management to make assumptions and estimates that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. The Company has adopted the
significant policies and their methods of application of the Predecessor. The
detailed accounting policies are as noted in the most recent annual audited
financial statements of the Predecessor.

    Change in accounting policies

    The Company adopted the new recommendation of the CICA Handbook Section
3031, Inventories. This section which is effective for year ends beginning
January 1, 2008, requires that inventories be measured at the lower of cost
and net realizable value. The initial implementation of this new policy did
not have an impact on the results of the Company. However, during the June
2008 quarter, the Forest Products segment benefited from an $11 million
favourable adjustment to the carrying value of its log inventories.
    The Company adopted the new recommendations of the CICA Handbook Section
3862, Financial Instruments-Disclosures, Section 3863, Financial
Instruments-Presentation, and Section 1535, Capital Disclosures. These new
Handbook sections are effective for interim and annual financial statements
beginning on or after October 1, 2007. Section 3862 requires an increased
emphasis on disclosing the nature and the extent of risk arising from
financial instruments and how the Company manages those risks. Section 3863,
establishes standards for presentation of financial instruments and
non-financial derivatives. Sections 3862 and 3863 replaced Section 3861,
Financial Instruments-Disclosures and Presentation. Section 1535 requires the
Company to disclose information to enable users of its financial statements to
evaluate the Company's objectives, policies and processes for managing
capital. Other than the additional disclosure in the notes to these financial
statements, the adoption of these Sections had no impact on the financial
results 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 of the Predecessor.


    2.  Discontinued operations

    In July 2007, the Predecessor 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 Predecessor recorded an asset impairment charge
of $173 million in the June 2007 quarter. The Predecessor has not identified a
feasible restructuring plan to resume operations at the facility. As well, the
Predecessor 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 Predecessor, its financial results have been reclassified as discontinued
operations. Comparative figures have also been reclassified to exclude the
coated paper results from the Predecessor's continuing operations.
    Condensed earnings from discontinued operations related to the
St. Francisville facility are as follows:

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Sales           $  -         $  -         $ 71          $ 2        $ 222
    Operating loss    (3)          (4)        (187)          (4)        (201)
    Financial
     expenses         (1)           -           (4)           -           (2)
    Loss from
     discontinued
     operations       (2)          (4)        (183)          (4)        (199)
    -------------------------------------------------------------------------
    Loss per common
     share from
     discontinued
     operations  $ (0.02)     $ (0.04)     $ (2.14)     $ (0.05)     $ (2.33)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Cash flows from
     operating
     activities     $ (2)        $ (4)        $ (7)        $ (4)       $ (17)
    Cash flows from
     investing
     activities        -            -           (1)           -           (4)
    -------------------------------------------------------------------------
    Cash flows used
     by discontinued
     operations     $ (2)        $ (4)        $ (8)        $ (4)       $ (21)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    3. Long-term debt

                                                            The          The
                                                        Company  Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                           June 28,     Feb. 29,    Sept. 29,
                             Maturity         2008         2008         2007
    -------------------------------------------------------------------------
    Tembec Inc. -
     6% unsecured notes       09/2012         $ 16         $ 18         $  -
    Tembec Inc. -
     6% unsecured notes       09/2009            -            -           20
    Tembec Industries -
     US $300 million,
     libor + 7%               02/2012          303          295            -
    Tembec Industries -
     US $350 million
     8.625% unsecured
     senior notes             06/2009            -            -          348
    Tembec Industries -
     US $500 million
     8.5% unsecured
     senior notes             02/2011            -            -          498
    Tembec Industries -
     US $350 million
     7.75% unsecured
     senior notes             03/2012            -            -          348
    Tembec SAS                12/2013           21           20           20
    Tembec Envirofinance SAS  06/2017           36           33           32
    Tembec Energie SAS        12/2014           10           10           10
    Proportionate share -
     Marathon (50%)           09/2008            5            5            7
    Proportionate share -
     Temlam (50%)             06/2015           42           42           39
    Other                     Various           10           12           21
    -------------------------------------------------------------------------
                                               443          435        1,343
    Less current portion                        21           21           26
    Less unamortized financing costs             -            -            3
    -------------------------------------------------------------------------
                                             $ 422        $ 414      $ 1,314
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Operating bank loans

    On February 29, 2008, the Company entered into a loan agreement with a
syndicate of lenders for a revolving operating credit facility of $205 million
maturing December 15, 2011 secured by all of the assets of the Company's
material North American subsidiaries. This facility has a first priority
charge over receivables and inventory having a carrying value of $594 million
and a second priority charge over the remainder of the assets having a
carrying value of $888 million. Interest is calculated based either on prime
rate or banker's acceptances rate. As at June 28, 2008, there were no drawings
on this facility and $40 million was reserved for letters of credit.
    The French operations are supported by several mill specific "receivable
factoring" agreements. As such, the borrowing base fluctuates periodically,
depending on shipments and cash receipts. As at June 28, 2008, the amount
available was $95 million, of which $42 million was unused.
    The joint ventures maintain their own operating lines, without recourse to
the Company, to meet working capital and liquidity requirements.

    Long-term debt

    On February 29, 2008, the Company entered into a loan agreement with a
syndicate of lenders for a non-revolving term loan of US $300 million due
February 28, 2012 secured by all of the assets of the Company's material North
American subsidiaries. This facility has a first priority charge over all
assets except receivables and inventories, where it has a second priority
charge. Interest is calculated based either on prime rate or libor rate.


    4. Other long-term liabilities and credits

                                                            The          The
                                                        Company  Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                           June 28,     Feb. 29,    Sept. 29,
                                              2008         2008         2007
    -------------------------------------------------------------------------
    Accrued benefit liability -
     pension benefit plans                   $ 165        $ 172         $ 63
    Accrued benefit liability -
     other benefit plans                        45           44           38
    Balance payable on acquisition of
     Jager Building Systems Inc.                 3            3            3
    Reforestation - BC operations                6            8            6
    Environmental and other asset
     retirement obligations                      2            2            4
    Deferred government assistance               -            -            4
    Deferred gain on sale of assets              -            -            4
    Other                                        2            2            3
    -------------------------------------------------------------------------
                                             $ 223        $ 231        $ 125
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    5. Share capital

    In accordance with the Plan of Arrangement, the Company reorganized its
capital structure as follows:

    Authorized

    Unlimited number of common voting shares, without par value
    Unlimited number of non-voting Class A Preferred shares issuable in series
without par value, with other attributes to be determined at time of issuance.
    11,111,111 warrants convertible in equal amount of common shares and
expiring March 3, 2012. The warrants shall be deemed to be exercised and shall
be automatically converted into new common shares when the 20-day
volume-weighted average trading price of a single common share reaches or
exceeds $12.00 or immediately prior to any transaction that would constitute a
change of control.

    a) Common shares and warrants issued

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Issued and fully paid:
      100,000,000 common shares                                        $ 564
      11,095,839 warrants                                                  6
    -------------------------------------------------------------------------
                                                                       $ 570
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    b)  Earnings per share

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

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Net earnings
     (loss) from
     continuing
     operations    $ (25)       $ (40)        $ 19        $ (98)       $ 128
    Net loss       $ (27)       $ (44)      $ (164)      $ (102)       $ (71)
    Weighted
     average
     number of
     common
     shares
     outstan-
     ding    100,000,000  100,000,000   85,616,232   85,616,232   85,616,232
    Dilutive
     effects:
      Employees
       stock
       options         -            -      218,193            -      190,172
      Weighted
       averaged
       number of
       diluted
       common
       shares
       outstan-
       ding  100,000,000  100,000,000   85,834,425   85,616,232   85,806,404
    Basic and
     diluted
     earnings
     (loss) per
     share from
     continuing
     operations  $ (0.25)     $ (0.40)      $ 0.23      $ (1.14)      $ 1.50
    Basic and
     diluted
     loss per
     share       $ (0.27)     $ (0.44)     $ (1.91)     $ (1.19)     $ (0.83)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    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
affect a decrease in the earnings per share.

    c) Stock-based compensation

    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.

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                              2008                      2007
    -------------------------------------------------------------------------
                               Shares     Weighted       Shares     Weighted
                                           average                   average
                                          exercise                  exercise
                                             price                     price
    -------------------------------------------------------------------------
    Balance, beginning of
     fiscal year            3,668,019       $ 6.28    4,829,239       $ 7.35
    Options expired           (53,611)        4.31     (102,202)        5.62
    -------------------------------------------------------------------------
    Balance, end of
     December               3,614,408         6.31    4,727,037         7.38
    Options expired          (144,389)        6.88      (62,269)       10.94
    -------------------------------------------------------------------------
    Balance prior to
     recapitalization       3,470,019         6.28    4,664,768         7.34
    Cancellation of old
     options               (3,470,019)        6.28            -            -
    Issuance of new options   202,649       107.56            -            -
    -------------------------------------------------------------------------
    Balance, end of March     202,649       107.56    4,664,768         7.34
    Options expired              (228)      106.18     (317,623)        6.54
    -------------------------------------------------------------------------
    Balance, end of June      202,421     $ 107.56    4,347,145       $ 7.40
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Following the recapitalization, the number of options outstanding under
the Predecessor were changed from 3,470,019 to 202,649 and the weighted
exercise price moved from $6.28 to $107.56 per share.


    6. Lumber 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

    2008

    Restructuring and asset impairment charges:

    During the February 2008 period, the Predecessor recorded a non-cash
charge of $1 million relating to the writedown of fixed assets at its
Temiscaming facility. As well, $2 million of mill closure provisions were
reversed.
    During the December 2007 quarter, the Predecessor recorded a non-cash
charge of $2 million relating to the writedown of its investment in the failed
Gaspesia project. As well, $1 million of mill closure provisions were
reversed.

    Gain on land sales and other:

    During the June 2008 quarter, the Company recorded a net gain of
$2 million on the sale of its 20% of the 25% equity interest it held in the
issued and outstanding shares in the capital stock of both AV Nackawic and
AV Cell.
    During the December 2007 quarter, the Predecessor completed the sale of a
number of land properties and recorded a gain of $16 million. As well, the
Predecessor reduced its participation in the equity of AV Cell Inc. from 50%
to 25% and recorded a gain of $4 million. The Predecessor also ceased applying
the proportionate consolidation method to this investment and began applying
the equity method.

    2007

    Restructuring and asset impairment charges:

    During the June 2007 quarter, the Predecessor recognized an impairment
charge of $173 million related to the property, plant, equipment, and related
spare parts of the St. Francisville, Louisiana, paper mill as the majority of
its long-lived assets are no longer recoverable and exceed their fair value.
    Also during the June 2007 quarter, the Predecessor recorded a net gain of
$1 million on the sale of the St. Raymond paper mill, which had been closed
during the June 2005 quarter. As a result of the sale, the balance of
$2 million of mill closure provisions was also reversed.
    During the December 2006 quarter, the Predecessor announced the permanent
closure of the Smooth Rock Falls, Ontario, pulp mill. The facility had been
idled since the end of July 2006. The Predecessor 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 Predecessor 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
Predecessor corresponds to approximately 82% of the total amount deposited. In
addition, the Predecessor 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:

    The Predecessor completed the sale of a number of land and other
properties and recorded a net gain of $4 million in the March 2007 quarter and
$8 million in the December 2006 quarter.
    Also, during the December 2006 quarter, the Predecessor completed the sale
of its small pine lumber operation located in Brassac, France. The transaction
had no significant effect on the Predecessor's financial statements.
    The following table provides an analysis of the other items by business
segment of the Predecessor:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                        2008
    -------------------------------------------------------------------------
                  Forest                              Corporate      Consoli-
                products         Pulp        Paper      & other        dated
    -------------------------------------------------------------------------
    Investments      $ -         $ (4)         $ -          $ 2         $ (2)
    Gain on land
     sales           (16)           -            -            -          (16)
    Other             (2)           1           (1)           -           (2)
    -------------------------------------------------------------------------
                   $ (18)        $ (3)        $ (1)         $ 2        $ (20)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                        2007
    -------------------------------------------------------------------------
                               Forest                                Consoli-
                             products         Pulp        Paper        dated
    -------------------------------------------------------------------------
    Lumber duties              $ (238)         $ -          $ -       $ (238)
    Pensions                        -           17            -           17
    Gain on land sales and
     other                        (12)           -           (1)         (13)
    Severance, other
     labour-related and
     idling costs                   -           12           (2)          10
    -------------------------------------------------------------------------
                               $ (250)        $ 29         $ (3)      $ (224)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The mill closure provisions are no longer significant and therefore not
reported.


    8. Interest, foreign exchange, and other

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Interest on
     long-term debt  $ 9         $ 12         $ 29         $ 27         $ 89
    Interest on
     short-term debt   1            1            2            4            7
    Interest income
     - lumber duties   -            -            -            -          (30)
    Interest income
     - other          (1)          (2)          (2)          (1)          (7)
    -------------------------------------------------------------------------
                       9           11           29           30           59
    Amortization
     of deferred
     financing costs   -            -            1            2            4
    Loss (gain) on
     consolidation
     of foreign
     integrated
     subsidiaries      2            1           (4)          (4)          (1)
    Other foreign
     exchange items    1          (10)          25            2            8
    Bank charges and
     other financing
     expenses          2            3            2            2            5
    -------------------------------------------------------------------------
                       5           (6)          24            2           16
    -------------------------------------------------------------------------
                    $ 14          $ 5         $ 53         $ 32         $ 75
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    9. Income taxes

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Earnings
     (loss) from
     continuing
     operations
     before income
     taxes and
     share in
     earnings
     of related
     companies     $ (23)       $ (38)        $ 24        $ (92)       $ 125
    -------------------------------------------------------------------------
    Income taxes
     based on
     combined
     federal and
     provincial
     income tax
     rates of 31.9%
     (2007 - 33.3%) $ (7)       $ (12)         $ 8        $ (29)        $ 42
    Increase
     (decrease)
     resulting from:
      Future income
       tax adjustment
       due to rate
       enactments      -            -            1            4            1
      Change in
       valuation
       allowance       9           13           11           35          (31)
      Rate
       differential
       between
       jurisdictions  (1)          (1)          (3)           2           (6)
      Non-taxable
       portion of
       exchange loss
       (gain) on
       long-term debt  1            1          (15)          (2)          (9)
      Non-deductible
       loss (gain) on
       consolidation
       of foreign
       integrated
       subsidiaries    -            1            1           (1)           1
      Other permanent
       differences     -            -            -           (3)           -
    -------------------------------------------------------------------------
                       9           14           (5)          35          (44)
    -------------------------------------------------------------------------
    Income tax
     expense
     (recovery)      $ 2          $ 2          $ 3          $ 6         $ (2)
    -------------------------------------------------------------------------
    Income taxes:
      Current        $ -          $ -         $ (4)         $ -         $ 34
      Future           2            2            7            6          (36)
    -------------------------------------------------------------------------
    Income tax
     expense
     (recovery)      $ 2          $ 2          $ 3          $ 6         $ (2)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    10. Employee future benefits

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

                          The Company                        The Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                   Three         Four        Three         Five         Nine
                  months       months       months       months       months
              to June 28,  to June 28,  to June 30,  to Feb. 29,  to June 30,
                    2008         2008         2007         2008         2007
    -------------------------------------------------------------------------
    Defined benefit
     pension plans   $ 3          $ 4          $ 6          $ 6         $ 16
    Other employee
     future benefit
     plans             1            2            1            2            4
    Defined
     contribution
     and other
     retirement plans  2            3            3            5            9
    -------------------------------------------------------------------------
                       6            9           10           13           29

    Portion included
     in Restructuring
     charge - mill
     closure (note 7)  -            -            -            -           17
    -------------------------------------------------------------------------
                     $ 6          $ 9         $ 10         $ 13         $ 46
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    11. Financial instruments

    Recognition and measurement

    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 CICA 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 of the Predecessor are classified as other
liabilities, all of which are measured at amortized cost. All derivatives and
embedded derivatives are measured at fair value and the Company has maintained
its policy not to use hedge accounting.

    Fair value

    The carrying amount of cash and cash equivalents, accounts receivable,
operating bank loans and accounts payable and accrued charges approximates
their fair values because of the near-term maturity of those instruments. The
fair value of long-term debt that is actively traded is based on the closing
trading value at the respective period-end dates. The fair value of the
long-term debt that is not actively traded, balance payable on acquisition of
companies and redeemable preferred shares of the Predecessor has been
determined based on management's best estimate of fair value to renegotiate
these financial instruments with similar terms at the respective year-end
dates.
    The carrying value and the fair value of long-term debt, balance payable
on acquisition of companies and redeemable preferred shares of the Predecessor
were as follows:

                                                                         The
                                                    The Company  Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                           June 28,     Feb. 29,    Sept. 29,
                                              2008         2008         2007
    -------------------------------------------------------------------------
    Carrying value                           $ 446        $ 438      $ 1,372
    Fair value                               $ 446        $ 438        $ 645
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financial risk management

    Overview

    The Company has exposure to the following risks from its use of financial
instruments:

    - Credit Risk
    - Liquidity Risk
    - Market Risk
      - Foreign Currency Rate Risk
      - Interest Rate Risk
      - Commodity Price and Operational Risk

    The Board of Directors has overall responsibility for the establishment
and oversight of the Company's risk management policy. The policy defines the
method by which the Company manages its risk through properly and prudently
administering the Company's financial assets, liabilities and derivatives.
Internal Audit measures the adequacy of the business control systems through
the execution of an Internal Audit Plan approved by the Audit Committee.

    Credit risk management

    Credit risk arises from the possibility that entities to which the Company
sells products may experience financial difficulty and be unable to fulfill
their contractual obligations. The Company does not have a significant
exposure to any individual customer or counterparty. As required in the Risk
Management Policy, the Company reviews a new customer's credit history before
extending credit and conducts regular reviews of its existing customers'
credit performance. All credit limits are subject to evaluation and revision
at any time based on changes in levels of credit worthiness and must be
reviewed at least once per year. Sales orders cannot be processed unless a
credit limit has been properly approved. The Company may require payment
guarantees, such as letters of credit, or obtains credit insurance coverage.
Bad debt write-offs have been insignificant in the past. The allowance for
doubtful accounts for the Company as at June 28, 2008 and February 29, 2008
and for the Predecessor as at September 29, 2007, remained unchanged at
$3 million.

    Exposure to credit risk

    The carrying amount of financial assets represents the maximum credit
exposure. The maximum exposure to credit risk at the reporting date was:

                                                                         The
                                                    The Company  Predecessor
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                           June 28,     Feb. 29,    Sept. 29,
                                              2008         2008         2007
    -------------------------------------------------------------------------
    Loans and receivables                    $ 379        $ 367        $ 380
    Cash and cash equivalents                $ 106        $ 116         $ 14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liquidity risk management

    Liquidity risk arises from the possibility that the Company will not be
able to meet its financial obligations as they fall due. The Company has an
objective of maintaining liquidity equal to 12 months of capital expenditures,
interest and principal repayments and seasonal working capital requirements,
which would require approximately $200 million of liquidity.

    Exposure to liquidity risk

    A liquidity reserve in the form of cash and undrawn revolving credit
facilities is maintained to assist in the solvency and financial flexibility
of the Company. Liquidity reserves totaled $291 million at June 28, 2008.
Repayment of amounts due within one year may also be funded by normal
collection of current trade accounts receivable and cash on hand.
    The following are the contractual maturities of financial liabilities,
including interest payments and excluding the impact of netting agreements:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                          Contrac-
                             tual                                       More
                Carrying     cash  6 months    6-12     1-2     2-5     than
                  amount    flows   or less  months   years   years  5 years
    -------------------------------------------------------------------------
    Secured bank
     loans         $ 380    $ 505      $ 21    $ 21    $ 55   $ 392     $ 16
    Unsecured
     loans            63       65         5       6      11      25       18
    Operating
     bank loans       70       70        70       -       -       -        -
    Trade and
     others          350      350       350       -       -       -        -
    Bank overdraft    20       20        20       -       -       -        -
    -------------------------------------------------------------------------
                   $ 883  $ 1,010     $ 466    $ 27    $ 66   $ 417     $ 34
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Foreign currency rate risk management

    The Company is exposed to currency risk on sales, purchases and long-term
debt that are denominated in a currency other than the respective functional
currencies of foreign and domestic operations, primarily the Canadian $ and
Euro. The currencies in which these transactions primarily are denominated are
Canadian $, US $ and Euro.
    The Company's revenues for most of its products are affected by
fluctuations in the relative exchange rates of the Canadian $, the US $ and
the Euro. The prices for many products, including those sold in Canada and
Europe are generally driven by US $ reference prices of similar products. The
Company generates approximately $2.2 billion of US $ denominated sales
annually from its Canadian and European operations. As a result, any decrease
in the value of US $ relative to the Canadian $ and the Euro reduces the
amount of revenues realized on sales in local currency. In addition, since
business units purchase the majority of their production inputs in local
currency, fluctuations in foreign exchange can significantly affect the unit's
relative cost position when compared to competing manufacturing sites in other
currency jurisdictions. This could result in the unit's inability to maintain
its operations during period of low prices and/or demand.

    Sensitivity analysis

    Based on 2008 planned sales volumes and prices, the following table
illustrates the impact of a 1% change in the value of the US $ versus the
Canadian $ and the Euro. For illustrative purposes, an increase of 1% in the
value of the US $ is assumed. A decrease would have the opposite effects of
those shown below.

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Sales increase                                                      $ 22
    Cost of sales increase                                                 3
    -------------------------------------------------------------------------
    Gross margin                                                          19
    Loss on US $ debt translation                                          3
    -------------------------------------------------------------------------
    Pre-tax earnings increase                                             16
    Tax expense increase                                                   5
    -------------------------------------------------------------------------
    Net earnings increase                                               $ 11
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Direct US $ purchases of raw materials, supplies and services provided a
partial offset to the impact on sales. This does not include the potential
indirect impact of currency on the cost of items purchased in the local
currency.
    Interest expense on the Company's US $ denominated debt provides a small
offset to its US $ exposure. To further reduce the impact of fluctuations in
the value of the US $, the Company has adopted a policy of hedging up to 50%
of its anticipated US $ receipts for up to 36 months in duration. The Company
does not currently hold any significant foreign exchange contracts.

    Interest rate risk management

    Interest rate risk is the risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in market interest
rates.

    Sensitivity analysis

    At June 28, 2008, if interest rates had been 100-basis points higher
(lower), related to the US $300 million term loan, interest would have
increased (decreased) by US $3 million annually.

    Commodity price and operational risk management

    The Company's financial performance is dependent on the selling prices of
its products. The markets for most lumber, pulp and paper products are
cyclical and are influenced by a variety of factors. These factors include
periods of excess product supply due to industry capacity additions, periods
of decreased demand due to weak general economic activity, inventory
de-stocking by customers, and fluctuations in currency exchange rates. During
periods of low prices, the Company is subject to reduced revenues and margins,
resulting in substantial declines in profitability and possibly net losses.
The Company may periodically purchase lumber, pulp and newsprint price hedges
to mitigate the impact of price volatility. The Company does not currently
hold any significant product price hedges.
    The manufacturing activities conducted by the Company's operations are
subject to a number of risks including availability and price of fibre and
competitive prices for purchased energy and raw materials. To mitigate the
impact of price fluctuations, the Company may periodically purchase hedges.
The Company does not currently hold any significant hedges.

    12. Capital management

    It is the Company's objective to manage its capital to ensure adequate
capital resources exist to support operations while maintaining its business
growth. The Company sets the amount of capital in proportion to risk. The
Company manages the capital structure and makes adjustments to it in light of
changes in economic conditions and the risk of characteristics of the
underlying assets.
    The Company monitors capital on the basis of net debt to total
capitalization ratio. Net debt is calculated as a total debt (long-term debt
plus bank indebtedness/operating lines) less cash and cash equivalents. Total
capitalization includes net debt plus shareholders' equity, deferred credits
and other.
    The Company's strategy, which is unchanged from September 29, 2007, is to
maintain the net debt to total capitalization ratio at 40% or less. The
objective is to keep a strong balance sheet and maintain the ability of the
Company to access capital markets at favourable rates. The debt to total
capitalization ratio for the Company as at June 28, 2008 and February 29, 2008
and for the Predecessor as at September 29, 2007 were 34%, 31% and 63%
respectively.
    The significant decrease in the net debt to total capitalization ratio
resulted primarily from the recapitalization transaction that occurred on
February 29, 2008.

    13. 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, (819) 627-4715,
john.valley@tembec.com; Source: Tembec Inc.


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890