Tembec reports financial results for its third quarter ended June 30, 2007



    MONTREAL, Aug. 2 /CNW Telbec/ - Consolidated sales for the third quarter
ended June 30, 2007, were $783 million, down from $862 million in the
comparable period last year. The Company generated a net loss of $164 million
or $1.91 per share compared to a net loss of $6 million or $0.08 per share in
the corresponding quarter ended June 24, 2006. Earnings before unusual items,
interest, income taxes, depreciation, amortization and other non-operating
expenses (EBITDA) was negative $7 million, as compared to EBITDA of
$21 million a year ago and EBITDA of $17 million in the prior quarter.
    The June 2007 quarterly financial results include an after-tax gain of
$93 million or $1.09 per share relating to a gain on translation of foreign
debt and an after-tax loss of $173 million or $2.02 per share relating to the
asset impairment of a coated paper mill. After adjusting for these items and
certain other items, the Company would have generated a net loss of
$86 million or $1.00 per share. This compares to a net loss of $55 million or
$0.65 per share in the corresponding quarter ended June 24, 2006, and a net
loss of $58 million or $0.70 per share in the previous quarter. The impact of
specific items on the Company's financial performance is discussed further in
the Management Discussion and Analysis (MD&A) of its financial results.

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

    The Forest Products segment generated negative EBITDA of $21 million on
sales of $212 million. This compares to negative EBITDA of $21 million on
sales of $213 million in the prior quarter. The sales decrease of $1 million
was caused primarily by lower selling prices for SPF lumber partially offset
by higher shipments. US $ reference prices for random lumber increased by
approximately US $5 per mbf while stud lumber increased by US $22 per mbf. The
increases in US $ reference prices were not enough to offset the negative
impact of currency as the Canadian $ averaged US $0.913, a 7% increase from US
 $0.854 in the prior quarter. The net price effect was a decrease in EBITDA of
$4 million or $12 per mbf. Margins were positively impacted by lower operating
costs. The June quarter also saw improved profitability in Engineered wood as
the summer period normally experiences increased activity. During the quarter,
the Company incurred $5 million of lumber export taxes, unchanged from the
prior quarter. Lumber export taxes are payable based on the recent 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.
    The Pulp segment generated EBITDA of $33 million on sales of $380 million
for the quarter ended June 2007 compared to EBITDA of $43 million on sales of
$382 million in the March 2007 quarter. Lower effective Canadian $ selling
prices were offset by increased pulp shipments, primarily hardwood paper
pulps. Reflecting the strength of the pulp market, Company inventories were at
20 days of supply at the end of June, down from 27 days at the end of the
prior quarter. US $ reference prices increased for all grades of pulp. The
increases in US $ reference prices were not enough to offset the negative
impact of the stronger Canadian $. The net price effect was a decrease of
$34 per tonne, decreasing EBITDA by $18 million. Margins were assisted by
lower reported manufacturing costs. While the local currency costs of the
French pulp mills remained relatively unchanged in Euros, the stronger
Canadian $ resulted in a $5 million reduction in reported Canadian $
manufacturing costs. The prior quarter also included approximately $3 million
of additional costs relating to an explosion in one of the two flash pulp
dryers at the Temiscaming high-yield pulp mill. The explosion occurred in
early February and the dryer was off-line for approximately one month. Total
downtime in the June quarter was 13,700 tonnes versus 16,800 tonnes in the
prior quarter. The latter amount included 12,400 of lost production associated
with the aforementioned dryer explosion.
    The Paper segment generated negative EBITDA of $12 million on sales of
$199 million. This compares to breakeven EBITDA on sales of $209 million in
the prior quarter. The sales decrease of $10 million was due to lower prices
for all grades of paper, partially offset by increased shipments. US $
reference prices for newsprint and coated papers declined by US $23 per tonne
and US $5 per short ton respectively. The reference price for coated bleached
board increased by US $7 per short ton. Currency was the biggest pricing
negative as the Canadian $ strengthened by 7% versus the US $. The net price
effect was a decrease of $79 per tonne, decreasing EBITDA by $19 million.
Lower reported manufacturing costs provided a partial offset to the decline in
selling prices. While the US $ cost of the St. Francisville paper mill
remained relatively unchanged, the stronger Canadian $ resulted in a
$5 million reduction in reported manufacturing costs. Total downtime in the
June quarter was 900 tonnes compared to 3,900 tonnes in the prior quarter. In
June 2007, the Company announced that the coated paper mill located in
St. Francisville, Louisiana, would be indefinitely idled as of the end of
July. Despite efforts to restructure the operations, the mill's financial
performance has been extremely poor. During the most recent quarter, this
facility accounted for the near totality of the $12 million of negative
EBITDA.

    Other
    -----

    Liquidity at the end of June 2007 was $218 million. The Company continues
with other initiatives to improve liquidity. The target for fiscal 2007 is to
generate $100 million of additional liquidity through a combination of asset
sales and increased working capital facilities. To date, a total of
$78 million has been generated through these initiatives.
    The Company is exploring strategic alternatives to improve its capital
structure and enhance liquidity. Strategic alternatives under consideration
include non-core asset sales, cost reduction initiatives, refinancing or
repayment of debt and issuance of new debt or equity. The review of strategic
alternatives is being undertaken by Tembec's management and is being overseen
by the Special Committee for Strategic Purposes and the Board of Directors.
BMO Capital Markets is providing financial advice to Tembec. The Company
remains focused on improving its operations in the context of a relatively
difficult environment for forest products, while retaining a collaborative
relationship with its customers, suppliers, and employees.
    Mr. Gordon Lackenbauer has resigned from the Company's Board of
Directors. Mr. Lackenbauer had served as a director since the creation of the
Company in 1973. "On behalf of the Board and the Company, I wish to thank
Mr. Lackenbauer for the significant contributions he made to Tembec over the
years," said James Lopez, President and Chief Executive Officer.

    Outlook
    -------

    Overall, the June quarterly operating results fell short of the Company's
expectations. The rapid appreciation of the Canadian $ and the Euro versus the
US $ negatively impacted all of the Company's business segments. While lumber
prices did improve in the latter part of the quarter, it was from historically
low levels. Looking ahead, pulp markets are expected to remain strong and
price increases have already been announced for the September quarter.
Newsprint and lumber will continue to be challenging as producers will need to
adapt to relatively weak demand fundamentals. As for the Company, it will
continue to focus on controllable items such as costs and operating
efficiency, the key elements of its recovery plan. Management will also be
expending considerable efforts to work with its financial advisors to develop
and review potential strategic alternatives to address its current leveraged
capital structure.

    Tembec is a large, diversified and integrated forest products company.
With operations principally located in North America and in France, the
Company employs approximately 9,000 people. Tembec's common shares are listed
on the Toronto Stock Exchange under the symbol TBC. Additional information on
Tembec is available on its website at www.tembec.com

    This press release includes "forward-looking statements" within the
meaning of securities laws. Such statements relate to the Company's or
management's objectives, projections, estimates, expectations or predictions
of the future and can be identified by words such as "anticipate", "estimate",
"expect" and "project" or variations of such words. These statements are based
on certain assumptions and analyses made by the Company in light of its
experience and its perception of future developments. Such statements are
subject to a number of risks and uncertainties, including, but not limited to,
changes in foreign exchange rates, product selling prices, raw material and
operating costs and other factors identified in our periodic filings with
securities regulatory authorities in Canada and the United States. Many of
these risks are beyond the control of the Company and, therefore, may cause
actual actions or results to materially differ from those expressed or implied
herein. The Company disclaims any intention or obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.

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

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                                                         June 30,   Sept. 30,
                                                            2007        2006
                                                                    (Audited)
    -------------------------------------------------------------------------
    Assets
    Current Assets:
      Cash and cash equivalents                       $       32  $       31
      Accounts receivable                                    417         405
      Inventories                                            471         483
      Prepaid expenses                                        23          20
    -------------------------------------------------------------------------
                                                             943         939

    Investments                                               29          32
    Fixed assets                                           1,579       1,807
    Other assets                                             145         169
    Future income taxes                                       92          63
    -------------------------------------------------------------------------
                                                      $    2,788  $    3,010
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities and Shareholders' Equity
    Current Liabilities:
      Bank indebtedness                               $        1  $        5
      Operating bank loans                                   112         235
      Accounts payable and accrued charges                   398         407
      Interest payable                                        28          19
      Current portion of long-term debt (note 3)              21          21
    -------------------------------------------------------------------------
                                                             560         687

    Long-term debt (note 3)                                1,404       1,433
    Other long-term liabilities and credits                  160         150
    Future income taxes                                      116         121
    Minority interest                                          5           5
    Redeemable preferred shares                               26          26

    Shareholders' equity:
      Share capital (note 4)                                 840         840
      Accumulated other comprehensive loss                    (3)         (3)
      Deficit                                               (320)       (249)
    -------------------------------------------------------------------------
                                                             517         588
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                                                      $    2,788  $    3,010
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                                 TEMBEC INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
    -------------------------------------------------------------------------

    Quarters and nine months ended June 30, 2007 and June 24, 2006
    (unaudited) (in millions of dollars, unless otherwise noted)

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                        Quarters              Nine months
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Sales                     $      783  $      862  $    2,297  $    2,469
    Freight and sales
      deductions                      92         102         266         293
    Lumber duties and export
     taxes (note 5)                    5          10          13          27
    Cost of sales                    656         688       1,888       2,039
    Selling, general and
     administrative                   37          41         107         117
    Depreciation and
     amortization                     44          48         138         160
    Recovery of lumber
     duties (note 6)                   -           -        (238)          -
    Restructuring and asset
     impairment charges
     (note 6)                        171           -         200         176
    Gain on land sales and
     other (note 6)                   (1)         (4)        (13)         (4)
    -------------------------------------------------------------------------
    Operating loss from
     continuing operations          (221)        (23)        (64)       (339)

    Interest, foreign
     exchange and other
     (note 7)                         49          42          73          73
    Exchange gain on
     long-term debt                 (111)        (54)        (63)        (57)
    -------------------------------------------------------------------------
    Loss from continuing
     operations, before
     income taxes and share
     in earnings of a
     related company                (159)        (11)        (74)       (355)

    Income tax (recovery)
     (note 8)                          3          (6)         (2)        (55)
    Share in loss (earnings)
     of a related company              2           1          (1)          1
    -------------------------------------------------------------------------
    Net loss from continuing
     operations                     (164)         (6)        (71)       (301)
    Earnings from
     discontinued operations
     (note 2)                          -           -           -          52
    -------------------------------------------------------------------------
    Net loss                  $     (164) $       (6) $      (71) $     (249)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic and diluted loss
     per share from
     continuing operations
     (note 4)                 $    (1.91) $    (0.08) $    (0.83) $    (3.52)
    Basic and diluted
     earnings per share from
     discontinued operations
     (note 4)                          -           -           -  $     0.60
    Basic and diluted loss
     per share (note 4)       $    (1.91) $    (0.08) $    (0.83) $    (2.92)
    -------------------------------------------------------------------------
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                                 TEMBEC INC.
           CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
    -------------------------------------------------------------------------

    Quarters and nine months ended June 30, 2007 and June 24, 2006
    (unaudited) (in millions of dollars, unless otherwise noted)

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                        Quarters              Nine months
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Retained earnings
     (deficit), beginning
     of period                $     (156) $     (188) $     (249) $       55
    Net loss                        (164)         (6)        (71)       (249)
    -------------------------------------------------------------------------

    Deficit, end of period    $     (320) $     (194) $     (320) $     (194)
    -------------------------------------------------------------------------
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           CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
    -------------------------------------------------------------------------

    Quarters and nine months ended June 30, 2007 and June 24, 2006
    (unaudited) (in millions of dollars, unless otherwise noted)

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                        Quarters              Nine months
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Net loss                  $     (164) $       (6) $      (71) $     (249)
    Other comprehensive
     income (loss):
    Exchange translation of
     foreign subsidiaries              -           -           -           -
    -------------------------------------------------------------------------

    Comprehensive loss        $     (164) $       (6) $      (71) $     (249)
    -------------------------------------------------------------------------
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                                 TEMBEC INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
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    Quarters and nine months ended June 30, 2007 and June 24, 2006
    (unaudited) (in millions of dollars)

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    -------------------------------------------------------------------------
                                        Quarters              Nine months
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Cash flows from operating
     activities:
      Net loss                $     (164) $       (6) $      (71) $     (249)
      Adjustments for:
        Earnings from
         discontinued
         operations (note 2)           -           -           -         (52)
        Depreciation and
         amortization                 44          48         138         160
        Unrealized foreign
         exchange and others
         (note 7)                     (3)         (3)          3         (35)
        Exchange gain on
         long-term debt             (111)        (54)        (63)        (57)
        Proceeds on sale of
         derivative financial
         instruments                   -           1           -           4
        Future income taxes
         (note 8)                      7          (1)        (36)        (53)
        Utilization of
         investment tax
         credits                      (6)          -          27           -
        Restructuring and
         asset impairment
         charges (note 6)            176          (1)        193         172
        Gain on land sales
         and other (note 6)           (1)         (4)        (13)         (4)
        Other                          1           5           -          10
    -------------------------------------------------------------------------
                                     (57)        (15)        178        (104)
    Changes in non-cash
     working capital:
      Temporary investments            -           -           -          16
      Accounts receivable              7          (3)        (12)         (1)
      Inventories                     96          97          (9)         52
      Prepaid expenses                 4           5          (4)         (1)
      Accounts payable and
       accrued charges                11           5          (1)        (43)
    -------------------------------------------------------------------------
                                     118         104         (26)         23
    -------------------------------------------------------------------------
                                      61          89         152         (81)
    -------------------------------------------------------------------------
    Cash flows from investing
     activities:
      Additions to fixed
       assets                        (23)        (17)        (54)        (66)
      Proceeds on land sales
       and other                       1          10          12          10
      Acquisition of
       investments, net of
       disposals                       1           -           3          (7)
      Other                           (6)         (1)        (15)         (2)
    -------------------------------------------------------------------------
                                     (27)         (8)        (54)        (65)
    Cash flows from financing
     activities:
      Change in operating bank
       loans                         (36)        (53)       (123)         75
      Increase in long-term
       debt                            3           3          43          13
      Repayment of long-term
       debt                           (4)         (2)        (13)         (8)
      Increase (decrease) in
       other long-term
       liabilities                     4          (4)          1          (2)
      Other                            1           2           -           8
    -------------------------------------------------------------------------
                                     (32)        (54)        (92)         86
    Cash generated (used) by
     continuing operations             2          27           6         (60)
    Cash generated by
     discontinued operations
     (note 2)                          -           -           -          91
    -------------------------------------------------------------------------
    Foreign exchange gain on
     cash and cash equivalents
     held in foreign currencies       (1)          -          (1)          -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net increase in cash and
     cash equivalents                  1          27           5          31
    Cash and cash equivalents,
     net of bank indebtedness,
     beginning of period              30           4          26           -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     net of bank indebtedness,
     end of period            $       31  $       31  $       31  $       31
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Supplemental information:
      Interest paid           $       22  $        7  $       87  $       74
      Income taxes paid       $        1  $        1  $        3  $        2
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                                 TEMBEC INC.
                  CONSOLIDATED BUSINESS SEGMENT INFORMATION
    -------------------------------------------------------------------------

    Quarters ended June 30, 2007 and June 24, 2006
    (unaudited) (in millions of dollars)

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                                                               June 30, 2007
    -------------------------------------------------------------------------

                                                              Corpo-
                         Forest                      Chemi-  rate &    Conso-
                       products     Pulp    Paper     cals    other  lidated
    -------------------------------------------------------------------------
    Sales:
      External          $   178  $   362  $   199  $    44  $     -  $   783
      Internal               34       18        -        1        -       53
    -------------------------------------------------------------------------
                            212      380      199       45        -      836

    Earnings (loss)
     before the
     following              (21)      33      (12)       2       (9)      (7)

    Depreciation and
     amortization            13       17       12        1        1       44

    Other items (note 6)      -        -      170        -        -      170

    Operating earnings
     (loss) from
     continuing
     operations             (34)      16     (194)       1      (10)    (221)
    -------------------------------------------------------------------------

    Net fixed asset
     additions                5       16        2        -        -       23
    -------------------------------------------------------------------------
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                                                               June 24, 2006
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                                                              Corpo-
                         Forest                      Chemi-  rate &    Conso-
                       products     Pulp    Paper     cals    other  lidated
    -------------------------------------------------------------------------
    Sales:
      External          $   226  $   365  $   221  $    50  $     -  $   862
      Internal               44       23        -        1        -       68
    -------------------------------------------------------------------------
                            270      388      221       51        -      930

    Earnings (loss)
      before the
      following               3       20        9        3      (14)      21

    Depreciation and
      amortization           13       20       13        1        1       48

    Other items (note 6)     (4)       -        -        -        -       (4)

    Operating earnings
     (loss) from
     continuing
     operations              (6)       -       (4)       2      (15)     (23)
    -------------------------------------------------------------------------

    Net fixed asset
     additions                7        8        1        -        1       17
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                                 TEMBEC INC.
                  CONSOLIDATED BUSINESS SEGMENT INFORMATION
    -------------------------------------------------------------------------

    Nine months ended June 30, 2007 and June 24, 2006
    (unaudited) (in millions of dollars)

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                               June 30, 2007
    -------------------------------------------------------------------------

                                                              Corpo-
                         Forest                      Chemi-  rate &    Conso-
                       products     Pulp    Paper     cals    other  lidated
    -------------------------------------------------------------------------
    Sales:
      External          $   522  $ 1,031  $   615  $   129  $     -  $ 2,297
      Internal              107       58        -        3        1      169
    -------------------------------------------------------------------------
                            629    1,089      615      132        1    2,466

    Earnings (loss)
     before the
     following              (55)      98       (4)       7      (23)      23

    Depreciation and
     amortization            41       55       36        3        3      138

    Other items (note 6)   (250)      29      170        -        -      (51)

    Operating earnings
     (loss) from
     continuing
     operations             154       14     (210)       4      (26)     (64)
    -------------------------------------------------------------------------

    Net fixed asset
     additions               11       35        7        1        -       54
    -------------------------------------------------------------------------
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                                                               June 24, 2006
    -------------------------------------------------------------------------

                                                              Corpo-
                         Forest                      Chemi-  rate &    Conso-
                       products     Pulp    Paper     cals    other  lidated
    -------------------------------------------------------------------------
    Sales:
      External          $   694  $   992  $   639  $   144  $     -  $ 2,469
      Internal              140       65        -        4        1      210
    -------------------------------------------------------------------------
                            834    1,057      639      148        1    2,679

    Earnings (loss)
     before the
     following               36       (1)      (9)       6      (39)      (7)

    Depreciation and
     amortization            40       74       40        3        3      160

    Other items (note 6)     (4)     169        7        -        -      172

    Operating earnings
     (loss) from
     continuing
     operations               -     (244)     (56)       3      (42)    (339)
    -------------------------------------------------------------------------

    Net fixed asset
     additions               24       36        5        -        1       66
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                                 TEMBEC INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    -------------------------------------------------------------------------

    (in millions of dollars, unless otherwise noted)

    1. Significant accounting policies

    Basis of presentation

    These unaudited consolidated financial statements have been prepared in
accordance with Canadian GAAP using the same accounting policies and methods
as the most recent audited consolidated financial statements. These interim
consolidated financial statements should be read in conjunction with the
annual audited consolidated financial statements for the year ended
September 30, 2006.

    Changes in accounting policies

    Effective October 1, 2006, the Company adopted the new recommendations of
the Canadian Institute of Chartered Accountants (CICA) under CICA Handbook
Section 1530, Comprehensive Income, Section 3251, Equity, Section 3855,
Financial Instruments - Recognition and Measurement, Section 3861 Financial
Instruments - Disclosure and Presentation and Section 3865, Hedges. These new
Handbook Sections, which apply to fiscal years beginning on or after
October 1, 2006, provide requirements for the recognition and measurement of
financial instruments and on the use of hedge accounting. Section 1530
establishes standards for reporting and presenting comprehensive income which
is defined as the change in equity from transactions and other events from
non-owner sources. Other comprehensive income refers to items recognized in
comprehensive income but that are excluded from net income calculated in
accordance with generally accepted accounting principles.
    Under Section 3855, all financial instruments are classified into one of
these five categories: held-for-trading, held-to-maturity investments, loans
and receivables, available-for-sale financial assets or other financial
liabilities. All financial instruments and derivatives are measured in the
balance sheet either at fair value except for loans and receivables,
held-to-maturity investments and other financial liabilities which are
measured at amortized cost. Subsequent measurement and changes in fair value
will depend on their initial classification, as follows: held-for-trading
financial assets are measured at fair value and changes in fair value are
recognized in net income. Available-for-sale financial instruments are
measured at fair value with changes in fair value recorded in other
comprehensive income until the instrument is derecognized or impaired. All
derivative instruments, including embedded derivatives, are recorded in the
balance sheet at fair value unless they qualify for the normal sale normal
purchase exemption. All changes in their fair value are recorded in income
unless cash flow hedge accounting is used, in which case changes in fair value
are recorded in other comprehensive income.
    As a result of the adoption of these new standards, the Company has
classified its cash and cash equivalents as held-for-trading. Accounts
receivable are classified as loans and receivables. The Company's investments
consist mainly of equity investments which are excluded from the
recommendations of this standard and of loans receivable which are classified
as loans and receivables. Bank indebtedness, operating bank loans, accounts
payable and accrued charges, long-term debt, including interest payable, and
redeemable preferred shares are classified as other liabilities, all of which
are measured at amortized cost. The Company has elected to measure all
derivatives and embedded derivatives at fair value and the Company has
maintained its policy not to use hedge accounting.
    Section 3855 also provides guidance on accounting for transaction costs
incurred upon the issuance of debt instruments or modification of a financial
liability. Transaction costs are now deducted from the financial liability and
are amortized using the effective interest method over the expected life of
the related liability. As a result of the application of Section 3855,
unamortized financing costs of $3 million ($7 million - September 2006),
previously recorded in Other assets, have been reclassified against long-term
debt. Previously recorded cumulative translation adjustment on self-sustaining
operations is now presented in Accumulated other comprehensive income. The
adoption of these new standards had no impact on the Company's deficit
position as at October 1, 2006.

    Carrying value and fair value of financial assets and liabilities are
summarized as follows:

    -------------------------------------------------------------------------
    Classification                                Carrying value  Fair value
    -------------------------------------------------------------------------
    Held-for-trading                                  $       32  $       32
    Loans and receivables                                    437         437
    Held-to-maturity                                           -           -
    Available-for-sale                                         -           -
    Other liabilities                                      1,990       1,420
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Effective October 1, 2006, the Company applied the accounting treatment
prescribed by emerging issues committee ("EIC") EIC-162 of the CICA Handbook
with respect to stock-based compensation for employees eligible to retire
before the vesting date. EIC-162 provides guidance to determine compensation
costs attributable to a stock-based award under a compensation plan that
contains a provision that allows an employee to continue vesting after the
employee has retired. The application of EIC-162 had no impact on the
financial statements of the Company.

    Business of the Company

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

    2. Discontinued operations

    On February 27, 2006, the Company completed the sale of its oriented
strandboard (OSB) business located in Saint-Georges-de-Champlain, Quebec to
Jolina Capital Inc. ("Jolina"). The comparative financial results of the OSB
operation have been reclassified as discontinued operations.
    Condensed earnings from discontinued operations related to the OSB are as
follows for the quarter and nine months ended June 24, 2006:

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                                                                        Nine
                                                         Quarter      months
    -------------------------------------------------------------------------
    Sales                                             $        -  $       38
    Operating profit                                           -           7
    Income taxes                                               -          19
    Earnings from discontinued operations                      -          52
    -------------------------------------------------------------------------
    Earnings per common share from discontinued
     operations                                       $        -  $     0.60
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Condensed cash flows from discontinued operations are as follows for the
quarter and nine months ended June 24, 2006:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                        Nine
                                                         Quarter      months
    -------------------------------------------------------------------------
    Cash flows from operating activities              $        -  $       10
    Cash flows from investing activities                       -          81
    -------------------------------------------------------------------------
    Cash flows generated by discontinued operations   $        -  $       91
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    3. Long-term debt

    -------------------------------------------------------------------------
                                                         June 30,   Sept. 30,
                                           Maturity         2007        2006
    -------------------------------------------------------------------------
    Tembec Inc. - 6% unsecured notes        09/2009   $       20  $       24
    Tembec Industries - US$350 million
     8.625% unsecured senior notes          06/2009          373         391
    Tembec Industries - US$500 million
     8.5% unsecured senior notes            02/2011          533         559
    Tembec Industries - US$350 million
     7.75% unsecured senior notes           03/2012          373         391
    Tembec SAS                              12/2013           20          10
    Tembec Envirofinance SAS                06/2017           31          21
    Tembec Energie SAS                      12/2014           10           -
    Proportionate share - Marathon (50%)    03/2006            7          10
    Proportionate share - Temlam (50%)      06/2015           40          40
    Other                                   Various           21          15
    -------------------------------------------------------------------------
                                                           1,428       1,461

    Less current portion                                      21          21
    Less unamortized financing costs                           3           7
    -------------------------------------------------------------------------

                                                      $    1,404  $    1,433
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    4. Share capital

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

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                        Quarters              Nine months
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Net loss from continuing
     operations               $     (164) $       (6) $      (71) $     (301)
    Net loss                  $     (164) $       (6) $      (71) $     (249)
    Weighted average number
     of common shares
     outstanding              85,616,232  85,616,232  85,616,232  85,616,232
    Dilutive effects:
      Employees stock
       options                   218,193      92,966     190,172      91,944
      Weighted average
       number of diluted
       common shares
       outstanding            85,834,425  85,709,198  85,806,404  85,708,176
    Basic and diluted loss
     per share from
     continuing operations    $    (1.91) $    (0.08) $    (0.83) $    (3.52)
    Basic and diluted loss
     per share                $    (1.91) $    (0.08) $    (0.83) $    (2.92)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    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.
    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. For the nine-month period ending
June 30, 2007, the Company had not granted any options (December 2005 -
634,741 stock options at $2.15; March 2006 - 439,800 stock options at $0.97).
The compensation expense recorded was not significant.
    The fair value of options granted was estimated on the date of grant using
the Black & Scholes option-pricing model with the following assumptions:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                               June 24, 2006
    -------------------------------------------------------------------------
    Dividend Yield                                                       0.0%
    Volatility                                                          37.6%
    Risk-free interest rate                                              3.9%
    Expected option lives (in years)                                     7.5
    -------------------------------------------------------------------------
    Weighted average fair value of options granted                $     0.64
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    The following table summarizes the changes in options outstanding and the
impact on weighted average per share exercise price during the period.

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                2007                    2006
    -------------------------------------------------------------------------
                                            Weighted                Weighted
                                             average                 average
                                            exercise                exercise
                                  Shares       price      Shares       price
    -------------------------------------------------------------------------
    Balance, beginning of
     fiscal year               4,829,239  $     7.35   4,129,253  $     9.00
    Options granted                    -           -     634,741        2.15
    Options expired             (102,202)       5.62     (43,900)      11.94
    -------------------------------------------------------------------------
    Balance, end of December   4,727,037        7.38   4,720,094        8.05
    -------------------------------------------------------------------------
    Options granted                    -           -     439,800        0.97
    Options expired              (62,269)      10.94    (140,686)      10.49
    -------------------------------------------------------------------------
    Balance, end of March      4,664,768        7.34   5,019,208        7.36
    -------------------------------------------------------------------------
    Options granted                    -           -           -           -
    Options expired             (317,623)       6.54    (105,480)       9.28
    -------------------------------------------------------------------------
    Balance, end of June       4,347,145  $     7.40   4,913,728  $     7.32
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    5. Lumber duties and export taxes

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

    6. Other items

    2007

    Restructuring and asset impairment charges:

    During the June 2007 quarter, the Company 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 Company 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 Company announced the permanent
closure of the Smooth Rock Falls, Ontario, pulp mill. The facility had been
idled since the end of July 2006. The Company recorded a charge of $29 million
relating to special termination pension benefits, severance and other relating
items.

    Recovery of lumber duties:

    During the December 2006 quarter, the Company recorded net proceeds of
$238 million pertaining to the recovery of lumber duties on deposit with the
USDOC that had accumulated since May 2002. The amount received by the Company
corresponds to approximately 82% of the total amount deposited. In addition,
the Company received a further $30 million, which corresponds to approximately
82% of the interest accrued on the deposits since May 2002. This latter amount
was recorded as interest income. The total amount of $268 million represents
substantially all of the monies the Company expects to receive as part of the
settlement.

    Gain on land sales:

    The Company completed the sale of a number of land and other properties
and recorded a net gain of $1 million in the June 2007 quarter, $4 million in
the March 2007 quarter, and $8 million in the December 2006 quarter.
    During the December 2006 quarter, the Company completed the sale of its
small pine lumber operation located in Brassac, France. The transaction had no
significant effect on the Company's financial statements.

    2006

    Gain on sale of other assets:

    During the June 2006 quarter, the Company's joint venture Temlam Inc.
completed the sale of its metal plates and webs operations located in Bolton,
Ontario. Based on the Company's 50% ownership, consideration received amounted
to $11 million including net working capital of $2 million. As a result of
this transaction, the Company recorded a gain of $4 million.

    Restructuring and asset impairment charges:

    During the March 2006 quarter, the Company recognized an impairment charge
of $169 million related to the property, plant and equipment of the Smooth
Rock Falls, Ontario, pulp mill as the majority of its long-lived assets are no
longer recoverable and exceed their fair value.
    Also during the March 2006 quarter, as a result of the ongoing
restructuring of the St. Francisville, Louisiana, paper mill, the Company
recorded an unusual charge of $7 million relating to additional severance and
other related costs.
    The following table provides an analysis of the other items by business
segment:

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                        2007
                                  Forest                               Conso-
                                products        Pulp       Paper     lidated
    -------------------------------------------------------------------------
    Fixed assets write-down   $        -  $        -  $      148  $      148
    Other assets                       1           -          22          23
    Lumber duties                   (238)          -           -        (238)
    Pensions                           -          17           -          17
    Gain on land sales               (13)          -           -         (13)
    Severance, other
     labour-related and
     idling costs                      -          12           -          12
    -------------------------------------------------------------------------
                              $     (250) $       29  $      170  $      (51)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                                        2006
                                  Forest                               Conso-
                                Products        Pulp       Paper     lidated
    -------------------------------------------------------------------------
    Fixed assets write-down   $        -  $      169  $        -  $      169
    Pensions                           -           -           4           4
    Gain on sale of assets            (4)          -           -          (4)
    Severance, other
     labour-related and
     idling costs                      -           -           3           3
    -------------------------------------------------------------------------
                              $       (4) $      169  $        7  $      172
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                        Quarters              Nine months
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Opening balance           $       10  $       12  $        9  $       19
    Additions: Severance and
                other labour-
                related costs          -           -          10           3
               Idling and
                other costs            -           -           2           -
    Reversal of mill closure
     provisions                       (2)          -          (2)          -
    Payments:  Severance and
                other labour-
                related costs         (1)         (3)        (10)        (11)
               Idling and
                other costs           (1)          -          (3)         (2)
    -------------------------------------------------------------------------
    Ending balance            $        6  $        9  $        6  $        9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    7. Interest, foreign exchange, and other

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                        Quarters              Nine months
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Interest on long-term
     debt                     $       29  $       30  $       89  $       90
    Interest on short-term
     debt                              2           5           7          12
    Interest income - lumber
     duties                            -           -         (30)          -
    Interest income - other           (1)         (2)         (5)         (3)
    Investment income                  -           -           -          (2)
    Interest capitalized on
     construction projects             -          (1)          -          (3)
    -------------------------------------------------------------------------
                                      30          32          61          94

    Amortization of deferred
     financing costs                   1           1           4           4
    Amortization of deferred
     gain on foreign exchange
     contract                          -           -           -         (38)
    Derivative financial
     instruments gain                  -          (2)          -          (1)
    Gain on consolidation of
     foreign integrated
     subsidiaries                     (4)         (2)         (1)          -
    Other foreign exchange
     items                            20          11           4          10
    Bank charges and other
     financing expenses                2           2           5           4
    -------------------------------------------------------------------------
                                      19          10          12         (21)
    -------------------------------------------------------------------------
                              $       49  $       42  $       73  $       73
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    8. Income Taxes

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                        Quarters              Nine months
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Loss before income taxes
     and minority interest
     from continuing
     operations               $     (159) $      (11) $      (74) $     (355)
    -------------------------------------------------------------------------
    Income taxes based on
     combined federal and
     provincial income tax
     rates of 33.3%
     (2006 - 33.3%)                  (53)         (4)        (25)       (118)
    Decrease (increase)
     resulting from:
      Future income taxes
       adjustment due to rate
       enactments                      1          (1)          1           3
      Change in valuation
       allowance                      76          15          40          78
      Rate differential
       between
       jurisdictions                  (6)         (2)         (9)         (7)
      Non taxable portion of
       exchange gain on
       long-term debt                (15)         (7)         (9)         (8)
      Other permanent
       differences                     -          (6)          -          (4)
      Large corporations tax           -          (1)          -           1
    -------------------------------------------------------------------------
                                      56          (2)         23          63
    -------------------------------------------------------------------------
    Income taxes (recovery)   $        3  $       (6) $       (2) $      (55)
    -------------------------------------------------------------------------
    Income taxes:
      Current                         (4)         (5)         34          (2)
      Future                           7          (1)        (36)        (53)
    -------------------------------------------------------------------------
    Income taxes (recovery)   $        3  $       (6) $       (2) $      (55)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    9. Employee Future Benefits

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

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                        Quarters              Nine months
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Defined benefit pension
     plans                    $        6  $        9  $       16  $       28
    Other employee future
     benefit plans                     1           2           4           8
    Defined contribution and
     other retirement plans            3           3           9          10
    -------------------------------------------------------------------------
                                      10          14          29          46

    Portion included in
     Restructuring charge -
     mill closure (note 6)             -           -          17           -
    -------------------------------------------------------------------------
                              $       10  $       14  $       46  $       46
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    10. 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 & Corporate Affairs, (819) 627-4387,
john.valley@tembec.com; Source: Tembec Inc.

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