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Domtar Posts Improved Quarter-to-Quarter Net Income

Nov. 7, 2007 - Domtar Corp. today reported net income of $36 million ($0.07 per diluted share) for the third quarter of 2007 compared to net income of $11 million ($0.02 per diluted share) in the second quarter of 2007. Sales for the third quarter of 2007 increased 4.9% from the second quarter to $1.7 billion.

The stronger results when compared to the second quarter of 2007 were primarily due to higher selling prices, lower costs related to planned maintenance shutdowns and to freight, as well as higher shipments, which in total improved net income by $0.07 per diluted share. This increase was partially offset by the negative impact of a stronger Canadian dollar, higher fiber costs and a higher tax rate which in total reduced net income by $0.02 per diluted share.

Included in the third quarter 2007 financial results were:

  • Costs of $14 million ($8 million after tax or $0.02 per diluted share) related to synergies, integration and optimization; and
  • A mark-to-market gain of $6 million ($3 million after tax or $0.01 per diluted share) related to financial instruments.

Included in the second quarter 2007 financial results were:

  • Costs of $7 million ($4 million after tax or $0.01 per diluted share)related to synergies, integration and optimization; and
  • A mark-to-market gain of $10 million ($6 million after tax or $0.01 per diluted share) related to financial instruments.

"Our profit margins expanded in the third quarter with better volumes and prices but also due to the strong operating performance of our paper, pulp and sawmilling operations," said Raymond Royer, President and CEO. "All of our business segments posted improved results and the momentum continues to build with prices for paper products and for pulp trending higher and with the benefits of initiatives aimed at delivering synergies gradually ramping up. Also, our continued efforts to bring a proper balance between supply and our customers' demand resulted in a significant reduction in our paper inventories in the quarter."

Commenting on market conditions, Mr. Royer added, "I am pleased with the continued support we get from our customers. Clearly, with paper shipments higher than the second quarter, we manage to maintain our leading position in North America in spite of the overall weakness observed in market demand year-to-date. By maintaining the same focus on building the franchise with service solutions and an easy access to our quality products, we are positioning the company to create significant shareholder value."

SEGMENT REVIEW

PAPERS

Operating income in our Papers business was $133 million in the third quarter of 2007 compared to operating income of $92 million for the second quarter of 2007. Depreciation and amortization in our Papers business totaled $122 million in the third quarter of 2007. When compared to the second quarter of 2007, sales increased 4.6% to $1.4 billion with paper and pulp shipments increasing by 4.3% and 0.9%, respectively. Lack-of-order downtime amounted to 84,000 tons, including 18,000 tons of lack-of-order downtime taken in July on three paper machines prior to the announcement of their closure on July 31. Paper inventories declined 72,000 tons throughout the quarter.

When compared to the second quarter, the increase in operating income is the result of higher average selling prices for paper and pulp, lower costs related to planned maintenance shutdowns and higher paper shipments. These factors were partially offset by higher costs for purchased fiber and chips.

PAPER MERCHANTS

Operating income in our Paper Merchants business was $6 million in the third quarter of 2007 compared to operating income of $2 million for the second quarter of 2007. Sales increased 10% to $249 million while deliveries increased 9.1%.

When compared to the second quarter, the increase in operating income is the result of higher deliveries, higher average selling prices and a decrease of $2 million in the allowance for doubtful accounts.

WOOD

Operating loss in our Wood business was $13 million in the third quarter of 2007 compared to operating loss of $20 million for the second quarter of 2007. Depreciation and amortization in our Wood business totaled $6 million in the third quarter of 2007. When compared to the second quarter of 2007, sales decreased 2% to $88 million while lumber shipments decreased 13% due to lower buy-and-resell activities of lumber produced by third parties, offset by higher shipments of chips and an increase of sales of premium lumber.

When compared to the second quarter, the decrease in operating loss is the result of lower costs as well as higher average selling prices. In the second quarter, manufacturing costs were negatively impacted by the gradual scale down of production at the White River, Ontario sawmill which was closed in July. Also, Domtar successfully restarted in late June its Val d'Or, Quebec sawmill with a new labor contract improving its unit cost competitiveness.

OUTLOOK

For the remainder of the year, price realizations for paper and pulp are expected to further improve as a result of recently announced price increases for several commercial printing paper grades and for pulp while volumes are expected to decrease from the third quarter due to seasonal factors typifying our business. Integration related costs are expected to continue to increase from the third quarter while the annualized run rate from synergies is targeted at $80 million by year-end. The strengthening in the value of the Canadian dollar toward the end of the third quarter is expected to have a significant negative impact on the cost structure and profitability of our operating Canadian mills.

THE TRANSACTION

Domtar Corporation started its operations on March 7, 2007 following the combination of the Weyerhaeuser Fine Paper Business and Domtar Inc. Prior to the completion of the Transaction, the Weyerhaeuser Fine Paper Business was operated by Weyerhaeuser Company.

The financial results of Domtar Corporation cover certain periods prior to the Transaction. For accounting and financial reporting purposes, Weyerhaeuser Fine Paper Business is considered to be the "predecessor" to Domtar Corporation and as a result, its historical financial statements now constitute the historical financial statements of Domtar Corporation. Accordingly, the results reported for the second and third quarter of 2007 include the results of operations of the new Company for the entire period. The results reported for the third quarter and the year-to-date of fiscal year 2006 include only the results of operations of the Weyerhaeuser Fine Paper Business, on a carve-out basis, for the entire period. The results reported for the year-to-date of fiscal year 2007 include the results of operations of the Weyerhaeuser Fine Paper Business, on a carve-out basis, for the period from January 1, 2007 to March 6, 2007 and the results of operations of the new Company for the period from March 7, 2007 to September 30, 2007.

SOURCE: Domtar Corp.




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