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Domtar Posts 4th Quarter Loss on Restructuring Charges

Feb. 1, 2006 - Domtar Inc. announced today a net loss of $348 million ($1.51 per common share) in the fourth quarter of 2005 compared to a net loss of $26 million ($0.11 per common share) in the fourth quarter of 2004 and a net loss of $52 million ($0.23 per common share) in the third quarter of 2005.

For the full year of 2005, Domtar recorded a net loss of $388 million ($1.69 per common share) compared to a net loss of $42 million ($0.19 per common share) in 2004.

"In November 2005, faced with a number of economic conditions that adversely impacted our business, such as higher energy prices and the rapid rise of the Canadian dollar, we announced a plan aimed at returning the Company to profitability as quickly as possible. This plan included permanent closures of mills and paper machines, which will mean an 18% reduction in our work force. Although the plan is on schedule, our fourth quarter performance was hit with a restructuring charge of approximately $400 million. Additional restructuring costs of approximately $80 million will occur over the next few years.

At the same time, we are confident that the various initiatives put in place with the support and commitment of our employees, combined with the loyalty of our customers, will ultimately have a positive effect. We will raise our productivity and optimize the use of our best mills by concentrating production in our more efficient operations. This way, Domtar will be in a better position when industry conditions improve.

Lastly, despite all the challenges encountered, we achieved our goal to deliver annualized targeted savings of $100 million by the end of 2005. We also improved our product offering by broadening our range of Domtar EarthChoice environmental FSC papers and by completing transition to the new 92 bright standard in all our paper mills," said Raymond Royer, Domtar's President and Chief Executive Officer.

The $67 million increase in operating loss excluding specified items in the Papers segment was mainly the result of the negative impact of a weaker U.S. dollar, lower shipments and higher overall costs, particularly for purchased energy, fiber and chemicals, as well as freight. These factors were partially offset by higher average selling prices for paper and pulp and the realization of savings stemming from restructuring activities.

The $5 million decrease in operating profit excluding specified items in the Paper Merchants segment was primarily due to lower operating margins resulting from higher purchased paper costs not being fully reflected in paper selling prices, partially offset by savings stemming from cost reduction initiatives.

The $10 million decrease in operating loss excluding specified items in the Wood segment was mainly attributable to lower duties on our softwood lumber exports to the U.S, higher shipments and the realization of savings stemming from restructuring activities. These factors were partially mitigated by the negative impact of a weaker U.S. dollar as well as higher freight and energy costs.

Since January 1, 2005, the countervailing and antidumping duties rate decreased gradually from 27.22% to 20.15% and in December 2005, the rate was lowered to 10.80%. Since May 22, 2002, Domtar has made and expensed cash deposits of $198 million for export duties.

The $22 million decrease in operating profit excluding specified items in the Packaging segment (our 50% share of Norampac Inc.) was mainly attributable to the negative impact of a weaker U.S. dollar, as well as higher overall costs, particularly energy and freight costs, partially offset by higher selling prices and shipments.

Free cash flow declined by $116 million in 2005 compared to 2004. This deterioration mainly reflects a decline in profitability as well as increased requirements for working capital.

Domtar's net debt-to-total capitalization ratio(1) as at December 31, 2005 stood at 57.7% compared to 49.5% as at December 31, 2004. Domtar's total long-term debt increased by $225 million, largely due to additional net borrowings of $293 million, partially offset by the $68 million positive impact of a stronger Canadian dollar (based on month-end foreign exchange rates) on its US dollar denominated debt.

Outlook

In 2006, we will carry out our announced restructuring plan and continue to improve our operations. Although we expect challenging market conditions in 2006, we are encouraged by recently announced price increases for most of our key products.

SOURCE: Domtar Inc.




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