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Domtar Reports Net Loss in Fourth Quarter

Feb. 15, 2008 - Domtar Corporation today reported a net loss of $26 million ($0.05 per diluted share) for the fourth quarter of 2007 compared to net income of $36 million ($0.07 per diluted share) for the third quarter of 2007. Sales for the fourth quarter amounted to $1.7 billion, unchanged from the third quarter 2007. Excluding the items listed below, the Company earned $29 million ($0.06 per diluted share) in the fourth quarter of 2007 compared to $44 million ($0.09 per diluted share) in the third quarter of 2007. The stronger Canadian dollar reduced earnings by approximately $0.02 per diluted share in the fourth quarter when compared to the third quarter 2007.

Fourth quarter 2007:

  • Charge of $96 million ($66 million after tax) related to the impairment of goodwill and property, plant and equipment;
  • Gains of $51 million ($35 million after tax) for lawsuit and insurance claim settlements;
  • Expenses of $25 million ($17 million after tax) related to the debt restructuring;
  • Costs of $21 million ($14 million after tax) related to synergies, integration and optimization;
  • Gain of $11 million related to a change in statutory income tax rates;
  • Closure and restructuring costs of $7 million ($5 million after tax); and
  • Gains of $2 million ($1 million after tax) related to financial instruments.

Third quarter 2007:

  • Costs of $14 million ($8 million after tax) related to synergies, integration and optimization;
  • Gains of $6 million ($4 million after tax) related to financial instruments;
  • Charge of $3 million related to a change in statutory income tax rates; and
  • Closure and restructuring costs of $2 million ($1 million after tax).

Commenting on the financial results, Mr. Raymond Royer, President and CEO said, “In the fourth quarter, our results were impacted by the unprecedented run-up in the value of the Canadian dollar against the U.S. dollar and by continued pressure on fiber, chemical and energy related costs. Nonetheless, we benefited from a better supply-demand balance in our system with reduced lack-of-order downtime, paper production in sync with our shipments and pricing momentum despite the seasonally slower period of the year.”

FISCAL YEAR 2007 HIGHLIGHTS

For fiscal year 2007, net income amounted to $70 million compared to net loss of $609 million for fiscal year 2006. Sales amounted to $5.9 billion for fiscal year 2007, including sales of Domtar Inc. from March 7, 2007 (please refer to section “The Transaction” for further explanation). Domtar synergy teams continued to aggressively pursue $200 million of transaction-related cost savings and efficiency improvement opportunities that the Company has committed to capturing in stages by March 2009. At the end of December, the Company had captured synergies with an estimated run-rate of $130 million surpassing the targeted $80 million run-rate. Based on the success to date, the Company remains confident that it will exceed its synergies goal of $200 million run-rate before the end of 2008.

“This has been a historic year for Domtar,” added Mr. Royer. “During 2007, we closed a transformational transaction creating a new leader in our industry, conducted a review of our operations resulting in the streamlining of our portfolio of assets and, as a result of our synergy efforts, identified and launched several projects aimed at reducing costs and improving efficiency. We completed a bond exchange and tender offers for the purpose of simplifying our capital structure, achieved and surpassed our first-year synergy target and strengthened our balance sheet. As we approach our first anniversary as a new Company, I cannot overlook how instrumental our employees were in achieving this remarkable performance. These actions will continue to benefit our organization as we execute on our strategy of establishing our presence to better serve our customers and build on our leading position in North America."

SEGMENT REVIEW

PAPERS
Operating income, including a $92 million charge for the impairment of property, plant and equipment associated with the fourth quarter announcement of the reorganization of our Dryden, Ontario mill, was $25 million in the fourth quarter of 2007 compared to operating income of $133 million in the third quarter of 2007. Depreciation and amortization totaled $124 million in the fourth quarter. When compared to the third quarter of 2007, sales remained unchanged at $1.4 billion. Shipments-to-production ratio was 98% in the fourth quarter compared to 106% in the third quarter. Paper inventories increased 17,000 tons throughout the quarter.

Excluding the $92 million of impairment of property, plant and equipment, the decrease in operating income, when compared to the third quarter, is the result of lower paper shipments, higher costs including costs related to synergies, integration and optimization, unfavorable foreign exchange and higher costs for fiber, energy and chemicals. These factors were partially mitigated by a lawsuit settlement, higher average selling prices for paper and pulp and higher pulp shipments.

PAPER MERCHANTS
Operating income was $1 million in the fourth quarter of 2007 compared to operating income of $6 million in the third quarter of 2007. Depreciation and amortization amounted to $1 million in the fourth quarter. Sales increased 5% to $262 million while deliveries increased 5%.

When compared to the third quarter, the decrease in operating income is the result of a decrease in allowance for doubtful accounts recorded in the third quarter and higher costs. These factors were partially mitigated by higher deliveries.

WOOD
The operating loss, including a $4 million charge for the impairment of goodwill, was $26 million in the fourth quarter of 2007, compared to an operating loss of $13 million in the third quarter of 2007. Depreciation and amortization totaled $8 million in the fourth quarter of 2007. When compared to the third quarter of 2007, sales decreased 10% to $79 million with lumber shipments decreasing 13%.

Excluding the $4 million of impairment of goodwill, the increase in operating loss, when compared to the third quarter, is the result of lower average selling prices, unfavorable foreign exchange and higher freight costs.

OUTLOOK

For 2008, inflation pressures on energy-related costs, including those related to fiber and chemicals, are expected to remain while costs related to integration are expected to decelerate in the second half of the year. Average paper price realizations are expected to increase after giving effect to price increases implemented toward the end of 2007 and additional pricing initiatives announced for 2008. Paper volumes are expected to stay relatively steady when compared to 2007. While there are indications that growth in the U.S. economy may continue to slow in the next months, this has not yet translated into Domtar’s Papers business.

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. The results reported for the third and fourth quarter of 2007 include the results of operations of the new Company for the entire period. The results reported for the 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 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 December 30, 2007.

SOURCE: Domtar Corp.




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